Trade Wise: Can MyEG's earnings match its valuations?

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This article first appeared in The Edge Malaysia Weekly, on April 11 - 17, 2016.

The justification for the valuations at which MyEG Services Bhd trades rests on the shoulders of the millions of migrant workers — documented and undocumented — in Malaysia. The company’s shares have come off their peak of RM2.38 seen in April 2015. But, at RM2.10, the counter is still trading at earnings multiples of 50 times — a valuation that several analysts polled by The Edge described as “on the high side”. But, the premium the market accords to the electronic services provider is rooted in the two government contracts it received in the last year and the potential earnings that will flow from them.

MyEG was appointed to process applications for the renewal of migrant worker permits online starting May 2015. Its work includes the compiling and maintaining of a database on the country’s documented and undocumented workers. The company was also picked to process applications for the rehiring of eligible undocumented workers. The new contracts add to the company’s already extensive portfolio of government jobs from processing automotive insurance and road tax to the collection of summonses on behalf of local authorities.

Macquarie Research (MER) has a target price of RM2.60 on the stock. In a March 31 note, it estimates that MyEG’s earnings will quadruple by the end of the financial year ending Dec 31, 2018 (FY2018), after seeing early indications of what the two migrant worker-related contracts mean for MyEG in the company’s 1H2016 financial results.

It writes, “Cessation of over-the-counter foreign worker permit renewal services in May 2015 channels transactions to MyEG’s online portal. Together with an increase in foreign worker permit quotas under the ongoing illegal foreign worker rehiring programme, MER forecasts MyEG’s foreign worker permit revenue to jump from RM40 million in FY2015 to RM260 million in FY2018.”

CIMB Research, meanwhile, calls the nationwide foreign worker permit renewal services an “earnings booster” for MyEG. The house has a higher target price of RM2.83 and a forecast of RM541 million in revenue and RM252.4 million net profit for FY2017.

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The bullish sentiment on the stock is not unexpected. Compulsory online renewal of migrant worker permits started in May last year and MyEG has a monopoly. A March 25 report by UOB Kay Hian Research says MyEG processes an average of 130,000 applications a month, indicating that the company has successfully helped employers transition to the online platform despite early protests. The number of applications a month is expected to grow to as high as 180,000. MyEG charges a transaction fee of RM35 per migrant worker for its online services and is also an agent selling compulsory insurance for these workers. MyEG earns average revenue of RM100 for every work permit renewal, analysts say.

In just over six months after the implementation, revenue from the renewal of migrant worker permits has grown to contribute half of MyEG’s earnings for the first half of 2016. During the six-month period, revenue more than doubled to RM124.2 million from RM57.5 million while net profit grew 123% to RM58.8 million.

So, analysts covering the stock expect the success of the implementation of the migrant worker permit renewal to be replicated in the rehiring scheme for undocumented workers. The rehiring scheme runs from Feb 15 to June 30 this year. Each registration under the rehiring programme could bring in an average of RM100 for MyEG.

Both MER and CIMB Research are “conservatively” expecting that a million out of the estimated five million undocumented workers will be registered during the period. CIMB Research, in fact, argues that if MyEG registers a total of two million workers as the government intends, its FY2016 and FY2017 earnings per share (EPS) would rise as much as 18% to 22%.

Earnings contribution from the rehiring scheme should start showing in MyEG’s third quarter 2016 financials. But, high expectations of the contribution may well be misplaced. While the number of undocumented workers in Malaysia appears high, far fewer are eligible to be registered by MyEG under the scheme.

First, the Immigration Department has set strict requirements that an undocumented worker and his employer must fulfil. Undocumented workers who do not hold valid travel documents, such as a passport, and those who did not enter the country through legitimate means are automatically excluded from the rehiring programme. Refugees who are currently working for Malaysian employers also do not qualify. In other words, only migrant workers who have overstayed their original work permits will qualify.

MyEG is one of a few agencies authorised to carry out the front-end registration process for the rehiring programme. Specifically, MyEG does not process applications for Indonesian and Myanmar nationals. According to data collected by the World Bank, Indonesians are Malaysia’s main migrant group at 39%.

Further, feedback from large employers and industry representatives suggests that businesses find the cost of the rehiring scheme too high and the 6 to 12-month processing period so long that it disrupts existing work schedules. According to MyEG, the cost of registration is RM1,134.52, excluding the compound which employers will have to pay to the Immigration Department for a worker’s overstaying.

“Even if you are willing to make the payment and wait that long, there is no guarantee that your application will be approved. In the meantime, the migrant worker is not allowed to work. It should be easier,” Matthew Tee, president of the Master Builders Association Malaysia tells The Edge.

The number of applications, Tee says, speaks for itself. CIMB Research reported that MyEG processed 13,000 applications in the first month, despite the short duration of the rehiring scheme.

Questions directed to MyEG on the progress of the rehiring programme after February went unanswered. It is also worth noting that MyEG bears the cost of repatriating workers who have registered for rehiring but fail to obtain approval from the Immigration Department.

“The forecast numbers for the registration for the renewal of migrant worker permits and the rehiring scheme is kind of a toss-up, isn’t it? No one knows how many workers will be registered every month and when the number will stop growing. It will take time for these numbers to show,” says a local equity analyst.

More cautious market observers point out that even if MyEG benefits from these migrant worker-related contracts, the sustainability of the company’s earnings in the longer term is questionable.

Danny Wong, a fund manager at Areca Capital, says MyEG migrant worker-related contracts are for relatively short periods of time, have no guarantee of renewal and are subject to unpredictable changes in immigration policy.

For example, MyEG imposed a fee of RM38 for the online renewal of migrants’ permits when it was first introduced. It was then asked by the government to reduce the fee to RM35. The government eventually agreed to bear the cost of the fee. Another instance is the government’s decision to impose a temporary but indefinite ban on the entry of migrant workers into Malaysia shortly after it signed a government-to-government agreement with Bangladesh to bring in 1.5 million Bangladeshi workers over three years.

Also, recall that the Malaysia Competition Commission (MyCC) has proposed to impose a financial penalty of RM307,200 on MyEG for abusing its dominant position in the provision and management of online migrant worker permit renewal applications. On top of that, there is an additional penalty of RM15,000 for each day MyEG fails to comply with remedial actions. The decision is not final and it could take years for the case to conclude. But, CIMB estimates that its EPS could fall by 21% to 19% if the company complies with MyCC’s remedial actions.

From the viewpoint of the stock’s current valuation, Wong says, “For me, the valuation is high at this point. The share price has grown too fast without proof of its earnings resilience. It is not necessarily overvalued, but from a risk angle we don’t know if it will deliver the expected earnings.”

Similarly, BIMB Securities Research has a “sell” rating on the stock due to its high valuations and a target price ex-bonus of RM1.61.

As a growth stock, MyEG’s share price performance rarely disappoints. In the last year, its share price has grown 52%. But, now the company’s earnings must match its soaring share price.