2Q FY June 2010 Results My EG Services Berhad

2 March 2010
Asia Analytical

1H FY10 results in line
Road tax, insurance continue to drive near term growth
Customs tax, immigration service to be launched 2Q
Strong growth ahead, maintain BUY


Earnings review
MyEG Services’ results for the first half of FY June 2010 were in line with our expectations. The company is Malaysia’s dominant e-services provider, providing a wide range of government-to-citizen (G2C) services.

MyEG posted sustained profits in 2QFY10, roughly similar to levels posted in the previous and preceding year’s quarters.

As a result, earnings growth for 1HFY10 was relatively flat. Revenue rose 11.6% y-y to RM28.4 million. Pre-tax and net profit rose 4% each to RM9.3 million and RM9.2 million, respectively. Pre-tax profit margins remain very high at 32.7%, although down marginally from 35% in 1HFY09.

These earnings account for 37% of our full year net profit forecast of RM24.9 million, which are within expectations as its earnings are highly seasonal, with a weak first half followed by a strong second half. The second half of its financial year-end is typically 50% higher than the first half as most young adults sit for their JPJ driving tests after completing their year-end exams.

The company’s earnings continue to be sustained by its JPJ driving license tests, with growth driven by the road tax renewal and insurance services. The road tax renewal service now attracts about 3,000 renewals daily and the insurance business captures about 150-200 premiums daily.

However, annual growth in overall profits was flat due to heavier advertising for brand building, and capex-related costs and depreciation associated with the expansion of its e-service centres and software development costs for new products, particularly for the customs tax monitoring service.

Despite the heavier capex needs, balance sheet remains in very good shape. Net cash stood at RM8.8 million in Dec 2009, up slightly from RM8.3 million in Sept 2009. The company has proposed an interim tax-exempt dividend of 0.5 sen, with the ex-date on 23 April 2010.


Earnings outlook & recommendation
MyEG’s earnings are poised to grow rapidly in the next few years, driven by:
1) The road tax renewal service and ancillary motor insurance premiums, which are rapidly gaining market share.
2) Increasing network and coverage, with its expanding number of e-service centres and e-service kiosks, particularly in Sabah and Sarawak. The company is also improving its reach through home delivery services.
3) New products and services. The most important of these will be the immigration (online renewal of foreign workers’ permits) and customs service tax monitoring initiatives to be rolled out this year.

The underlying market for MyEG’s services is very large, with relatively resilient and recurring, demand. Demand is also being supported by the growing popularity of online services and transactions for convenience and cost reasons.

The road tax services are supported by a large number of vehicles and drivers, with road taxes that need to be renewed annually, annual insurance premiums and drivers’ licenses renewal due every five years.

The new services, for immigration and customs service tax, are also supported by a very large target customer base. There is an estimated 2.1 million foreign workers in Malaysia. The government collected about RM11.6 billion in service taxes in 2008.


Road tax renewal service
The road tax renewal service will underpin MyEG’s growth in the near term, until the customs tax monitoring and immigration services takes shape. The latter two new services will drive earnings over the longer term.

The road tax renewal’s online and kiosk-based services have been well received.

We understand the on-line service currently attracts well over 3,000 transactions per day, and the number of motor insurance premiums sold daily has increased to 150-200. We understand it is now the single biggest independent insurance agent, by the number of policies issued.

For the kiosk-based service, MyEG has placed kiosks in a number of financial institutions and is increasing market reach via its e-service centres, which offer customers the option to print the road tax discs directly.


Customs tax monitoring
As noted in our earlier updates, the customs tax monitoring service will be the most significant of the new services proposed. MyEG hopes to softlaunch the system by May 2010, starting with 1,000 external sites.

This initiative involves linking up point-of-sales (POS) terminals of businesses that are subject to customs sales & service tax (such as restaurants and entertainment outlets) to minimize under-declaration of taxes and customs administrative paper work.

MyEG’s infrastructure will be compatible with the proposed goods and services tax (GST) system, which is expected to be implemented nationwide in 2011 as it is essentially a POS system to capture the value of sales.

With the implementation of the GST system, MyEG’s services should expand even further, as most businesses will be captured under the GST system, unlike the current service tax regime, which focuses on selected businesses.

The service will be undertaken via a special purpose vehicle (SPV), where MyEG will hold a 40% share and 2-3 other parties the balance.

The SPV will undertake the program and install a software at each POS terminal for the link up – at the SPV’s cost. We understand the cost is around RM1,000 per terminal. In return, the SPV will receive a share of the additional service and sales taxes collected, after adjusting for GDP growth.

Earnings visibility for the new service is uncertain at this juncture, as it depends on how much taxes were “under-declared” in the past and the undisclosed revenue sharing ratio between the government and the SPV.

But as we noted, the potential market is very large – and will widen even further once GST is implemented. As such, this project can potentially generate high returns, but with also considerable risks given the large capex needs.

The SPV will spend RM100 million initially and will start off with entertainment outlets and restaurants, which we understand accounts for about RM500 million in such taxes annually.


Immigration services
MyEG will be soft-launching its new e-immigration service in April 2010. This involves the online renewal of foreign workers’ permits, which will later be extended to new applications for such permits.

With this service, employers of foreign workers – such as factories, businesses and households (for domestic maids) can apply for the renewal of their foreign workers’ permits online, hassle-free and at minimal costs.

Most renewals are currently undertaken by agencies, who charge high fees of around RM200 per renewal, especially for domestic maids.

We understand MyEG is looking to charge in the region of RM50 per transaction, excluding the government levies, subject to changes.

We understand the specially printed permits will be personally delivered to the customers’ homes or offices by MyEG’s personnel team, who will affix it to the workers’ passports for security reasons.

With an estimated 2.1 million foreign workers in Malaysia, the potential for this service is large – and recurring, as permits are renewed annually.


We are maintaining our BUY recommendation and forecasts for MyEG.

We have not included the new services yet in our forecasts, which will likely be more evident in FY12. The customs tax monitoring business could have a major impact on earnings going forward, especially with the expected GST implementation, but it is too preliminary to assess at this juncture.

We expect net profit to rise by 45% to RM24.9 million in FY10 and 28% to RM31.9 million in FY11.

The stock’s P/E valuations are inexpensive at 10.4 and 8.1 times for FY10-11 earnings, especially relative to its robust growth, high ROE and margins, and the ability to add new services to widen its product and earnings base.