MYEG (0138) - MYEG - An opportunity or a falling knife?
There were headlines last week that the government has decided to end MYEG’s monopoly. This statement itself is misleading. If you diagnosed what the deputy home minister had said, he was probably helping the home minister, who announced on January that all counters in the immigration office will be closed, and every renewal of foreign workers would thus have to go through MYEG then, to seek a solution to stop people for claiming MYEG is a monopoly, but being our BolehLand media, they had also misinterpreted the statement that government has decided to end MYEG’s monopoly on foreign workers renewal. Share price has fallen like a knife, down 15%, and this is the first time I saw MYEG had experienced such volatility. Now the question is, BUY or AVOID?
TP: RM3.60
Current price: RM2.56
Market cap: RM3b
Upside: 41%
(A) MYEG’s business services
You might not know that MYEG provides alot of services like:
(i)
Road tax renewal – MYEG charges RM2.75 and they also earned from its
delivery services, at RM6-10 per delivery. Currently, there were 11.5m
number of cars registered in Malaysia, and since the past 3 years, MYEG
had also been gaining market share, and at 50% market share, revenue
could be more than RM50m.
(ii) New drivers
test- MYEG probably charged RM20 per person from providing this
services. Every year, there are about 800k of new drivers that are
seeking to partake test.
iii) Driving license
renewal – MYEG charged RM2.75 for each renewal, and there are 15 million
number of registered drivers in Malaysia, and since the last 5 years,
this segment has also been growing. MYEG’s market share probably stands
at about 30%. At 30% market share, revenue could be more than RM10m
assuming one renew their roadtax on an average 3 years. Of course,
delivery charges are provided as well.
(iv)
Foreign workers renewal – MYEG started this segment as maid renewal
permit until the government approves MYEG’s system to be one of the
provider besides immigration counter to provide this renewal services to
employers in Malaysia. This had become the current hot issue. A lot of
investor might have thought that MYEG might lose its whole business
segment in this area or the government might request MYEG to charge 0,
and MYEG might experience significant losses. Bear in mind, this would
not happen, as MYEG has invested all their capex previously for the
system and currently, according to the Deputy Home Minister, MYEG’s
system provides the best solution for this.
Why
not the counter instead? As BNM encourages more and more e-transaction
and e-cash and with its initiative of reducing the amount of physical
cash in the market (look at GHL’s performance todate), the government
had realized that employing people and opening counters in the
immigration probably cost more to the employers and to the government in
total rather than paying a simple RM38 processing fees to MYEG via
online. Why is that so? To employers, they would have to employ runners
at RM200-300 just to renew them. To the government, employees and
counters’ operating cost had also been considered too. Some may argue
that, some large corporation will be unhappy because, if they wanted to
renew 10,000 workers, they would have to pay RM380,000 per year to MYEG,
instead of probably employing 2 workers in the office at annual salary
of maybe RM60-80k to execute these applications in the counter. Yes,
there were issue raised by them.
So what is the solution?
From Chinese paper dated March 2015 from Sin Chew. Apparently, there
were discussion held that in the future, government will require MYEG to
charge RM0 to the employers. Yes! FREE! This does not mean that MYEG
will get 0 revenue from here, because by using MYEG’s system, government
would have to somehow compensate MYEG’s for their services and system,
and government actually saves this by doing nothing much and they had
actually increased their processing fees to RM125 beginning of this
year, which will be sufficient to compensate MYEG for a smaller amount
of RM38 fees. Read more below to understand MYEG’s so called
“monopoly”, it is not a monopoly, it is just no competitor could compete
with MYEG.
(v)
Custom tax monitoring system – MYEG had proposed to the government 3
years ago to track the tax collection received particularly from
restaurants and entertainment centres, and MYEG had taken a bet here
that, if they are able to generate more than 10% on average for the next
6 years cumulatively, base on 2014’s tax collection, MYEG will receive
RM1,000 per outlets per year for the services they provided. If they
could not, MYEG will receive RM0 and considered this as a free service
to the government. However, with stringent rules on GST which is based
on value-added tax, I see no problem for MYEG to generate a higher tax
collection for the government from here, and RM30m revenue per year for
part of Phase 1 (60,000 shops) is definitely a sure revenue to MYEG. If
this is successful, the next major kicker is Phase 2 (500,000 outlets) –
a major potential catalyst to MYEG, imagine RM500m revenue per year!
Mind blowing. I expect this to be announced for the next 6 months.
(vi)
Business insolvency checks – You could check company’s insolvency
status in MYEG too. I am not sure about the revenue generation from this
segment, but I expect it to be more than RM5m here annually.
(vii)
Vehicle transfer ownership – MYEG provides voluntary and temporary
vehicle transfer ownership and their current market share is about xx%.
Each year, the secondary market of vehicles are active, at about xxx
transactions per year. At RM25.50 for a car and RM7.50 for a motor, MYEG
is able to generate close to RM15m with a market share of only 40%!
(viii)
Road safety kid – MYEG has done a pilot test to install a monitoring
system for bus drivers in Malaysia and according to MYEG, accident rates
will fall with their system. Bus companies will be able to save cost
through lower insurance, and this will be provided to MYEG as revenue.
If this is made mandatory by the PDAM, Phase 1 will be 30,000 buses, and
this revenue would not be small either, if 50% of them use, MYEG’s
yearly revenue could reach RM30m.
(x) GST
software – Most of you might not know that MYEG is a provider of GST
software too. I checked out CIMB’s report but unfortunately, they had
not included into their forecast yet. There are so many competitors like
MYOB and YGL, probably providing more than RM5000 per subscription. But
according to channel checks, MYEG might be providing at RM1000 annually
only for using MYEG’ GST software. Why is this huge? Remember on custom
tax monitoring services, for Phase 1, there will be 60k number of shops
that are required to install MYEG’s system to track their tax
collection. To ease the convenience of the owner, MYEG’s software will
be cost effective for them.
Take a look at here: Assuming
Phase 2 starts at 2016, we will see about 200,000 shops here that MYEG
could capture its software market from. At a market share of 30%, we are
seeing a potential revenue of RM60m per annum!
(xi)
Car insurance – MYEG has taken opportunity to sell car insurance on
their site too. This has brought in good revenue for MYEG although the
segment is quite competitive. By offering a different online platform to
customers, MYEG is able to get a “cut” from insurance provider, and
thus, at more than 250k transactions and RM1,000 of fees, a revenue of
RM25m is quite certain.
(B) Financials
(C) Technical analysis
Generally,
MYEG is still on an uptrend mode, above 100 days moving average but
MYEG has experienced a sharp drop from RM2.90, and the volume has been
scary, what should we do now in order to take a position on good
fundamental stocks like MYEG? Buy near support levels, if the
announcement of government absorption comes in, RM3 is a no brainer for
sure.
S1: RM2.48, S2: RM2.40
R1: RM2.64, R2: RM2.9, R3: RM3.05
(D) Valuation
Look
at their latest results on Q2 2015 which ends at Dec 31, the generated
EPS of 2.4 cents! That was before the announcement of counter closing.
Historically, Q4 is stronger than Q3 > Q2 > Q1. Why? The demand
for new driving licences generally increase in the first half of the
year due to mainly long school holidays after exams. And with foreign
workers renewal applications surging, I foresee EPS to potentially hit
3.5 cents for Q3 and 3.8 cents in Q4. If you annualised that, MYEG is
probably trading at about 20 times FY2015 P/E only! Ridiculous P/E? I
don’t think so, what kind of business deserves high P/E? Some will say
recession proof business like Nestle, some will say strong growth
profile like IFCA, but MYEG has the best of both worlds, a recession
proof business (will you not renew your driving license during
recession? Will employers stop hiring foreign workers during recession?
Probably they hire more to cut cost?) and good growth profile (each
business segment is growing at a decent rate, some at double digit and
some at more than 30-40% growth like foreign workers permit, and I have
not spoken about custom tax monitoring system yet)
With
next financial year FY2016, with the addition of custom tax monitoring
system and possibly GST accounting software, what do you think the P/E
will fall to? According to CIMB, at current price, MYEG is only trading
at 14x CY2016 P/E! That is ridiculous cheap for a company like MYEG.
For me, MYEG definitely deserve a minimum 20x forward P/E. With earnings
from CSTM and growth from other segment, 18c EPS is possible for
FY2016.
(E) Risk reward ratio
MYEG’s foreign worker permit renewal to be abolished? Then who is going to do then?
MYEG provides free services for FWPR without government compensation? Any such dealing happened in the history before?
New
competitor coming into the picture to “snatch” MYEG’s cake? MYEG has
the best system, FYI, and no competitor currently could provide that,
and the connection and network with JPJ is not easy, even our Minister
scratched their head how to find competitor for MYEG. Even with new
competitor, they might just be an outsourcing partner for MYEG, ie,they
still have to use MYEG’s system to renew.
CSTM
gets abolished? For a more tax efficient and transparent policy, do you
think government will stop this initiative? MYEG has taken 3-4 years to
propose CSTM and FWPR system to government before they got approved and
started gaining market share.
(i) Upside return of 41% - By using P/E of 20x, MYEG should be valued at RM3.60
(ii) Downside risk of 7% – RM2.40, before the surge of the news from foreign workers renewal permit on January 1
I am very confident that MYEG will reverse soon, easily hitting RM3 in the next 1-2 months.
R/R ratio: 6 times.
(F) Catalyst
(i)
Government to solve this issue. The best is to absorb the processing
fees, a win-win situation for MYEG/employers and government.
(ii) CSTM a success. There are 500,000 outlets on Phase 2, imagine this project kicks in.
(iii) GST accounting software to further boost their CSTM’s services
(iv) Road safety kid project to kick off, expected next 3-6 months
(v) New vehicle registration and e-bidding for vehicle numbers
If
everything goes well, MYEG could potentially generate more than
RM400-500million profit in the next 2 years. A company that is truly
scalable in Malaysia with good growth prospect. That would rate MYEG at
RM6.70 – RM8.00 in the next 2 years. 100-150% upside? Why not? You make
the decision. Cheers!
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