Jan 23, 2017

MY E.G. Services

● We recently hosted MYEG's management team at our flagship ASEAN conference in Singapore. MYEG was represented by its Group Managing Director, Mr T S Wong, and Head of Corporate Finance and Investor Relations, Ms Chong Mei Yee.
● Following the event, we gather two things. (1) The Immigration Department of Malaysia remains serious about legalising illegal foreign workers (it recently froze RM125 mn worth of assets from 15 suspects hiring illegal workers – link to article); and (2) the GST monitoring project should kick start in 1H17 as planned.
● Key catalysts for the stock. (1) Pick-up in take-up rate for legalisation of illegal foreign worker program, (2) faster-than- expected roll out for foreign worker hostels, and (3) faster-than- expected roll out for MYEG's GST monitoring project.
● All in, our earnings growth trajectory remains intact, although we now see upside to our estimates for total number of signups for illegal foreign workers. For now, we leave our 500k estimate unchanged and reiterate our OUTPERFORM rating on the stock.

MYEG financial data

Growth trajectory remains intact
We recently hosted MYEG's management team at our flagship ASEAN conference in Singapore. MYEG was represented by its Group Managing Director, Mr T S Wong, and Head of Corporate Finance and Investor Relations, Ms Chong Mei Yee. Following the event, we gather two things:
● The Immigration Department of Malaysia remains serious about tackling the illegal foreign worker issue; it recently froze RM125 mn worth of assets from 15 suspects hiring illegal workers - link to article; and
● The GST monitoring project should kick start in 1H17 as planned; Second Finance Minister Johari Abdul Ghani said there was no need for a budget recalibration, implying that it intends to rollout the project soon – link to article

Government remains serious about legalising illegal foreign workers
While management remains tight-lipped about the total number of applications it has processed in FY17, it guided that registrations have picked up since the government started to ramp up enforcement. According to the press (link to article), the government wants Malaysia to be free of illegal immigrants by 2020. As such, we believe that the government will probably continue to push Malaysian companies to legalise their foreign workers (1 mn registrations remains the target, for the time being). For now, we retain our 500k estimate but if registrations are higher than expected, there could be an upside to our existing estimates (Figure 1 provides a summary of our sensitivity analysis).

Figure 1: Sensitivity analysis on registration of illegal foreign workersanalysis of malaysia foreign workers

GST monitoring project to kick start soon?
Given that there is no further recalibration of Budget 2017, it would seem like MYEG's GST monitoring project should be able to kick start soon (in 1H17). To recap, MYEG will only be paid if total GST collected in the following year is at least 10% higher than the previous year, before these devices were installed. This would imply that earnings from this project will only be factored into its FY18 financials (in 3Q FY18/4Q FY18)—this is in line with the estimates in our model currently. If MYEG could successfully roll out these devices at a faster-than-expected pace, there could also be upside to our existing estimates as we have only factored in 250k devices installed vs management's internal target of 500k (our bull case scenario suggests that MYEG's target price could be lifted by 39% to RM2.50).

Maintain OUTPERFORM
All in, our earnings growth trajectory remains intact although we now see upside to our estimates for total number of signups for illegal foreign workers, and possibly, the total number of GST monitoring devices installed. That said, we leave our existing estimates unchanged for now. We reiterate our OUTPERFORM rating on the stock and our DCF-based target price remains unchanged.

Key risks to our call: (1) further delays in MYEG's GST monitoring project; and (2) unfavourable outcome on MYEG's on-going litigation case related to its GST monitoring device.

source: Credit Suisse 20/1/2017