Stock with profit margin above 50%, ROE above 30% and double digit growth
Myeg 0138 #myeg
Business Overview:
Myeg is renowned for providing Electronic Government (e-government) services for Malaysia. They business can be classified into 2 division as below:
1) Government to Citizen (G2C) - G2C services refers to services such as driving theory test bookings, issuance and renewal of licences, electronic bill payment and payment ("EBPP") as well as online information services such as traffic summons checking and electronic bankruptcy or liquidation status searches (e-Insolvency).
2) Government/ Enterprise Solution (GES) - GES are non-Internet based services such as software and enterprise solutions, system development and maintenance as well as services rendered at the e-Services Centres. These services are non-Internet based and cannot be transacted by citizens independently. The target markets for such services are driving schools, insurance companies, law firms etc
How Myeg make money?
1) Concession based services (20% revenue) - Mainly in Immigration department and JPJ segment, providing services such as online road tax renewal, online foreign worker work permit renewal.
2) Commercial based services (80% revenue) - online auto insurance renewal, foreign worker insurance renewal and job placement services.
As myeg had changed their financial reporting period twice (from June to Sep and Sep to Dec), latest annual report available and upcomming annual report will show financial statement for 15 months and without comparative figure. As such, when looking at the annual report to see the growth in revenue, i compare it by quarter in average (latest result divide by 5 quarter and prior year result divide by 4 quarter) and notice that there is a decrease in concession based services while increase in commercial based services
Looking at latest quarter report, Myeg have a healthy balance sheet of current ratio of above 1 and cash above 75mil. Besides that, it also manage to grow its quarter PAT to above 60mil in the latest 2 quarter (yoy and qoq growth for 2 consecutive quarters). As Myeg is a company with MSC status, the tax expense is often low. Moreover in 2019 Myeg spent RM91 mil on share buy back and currently have 140mil shares retained as treasury shares.
The main risk we are looking at Myeg is the political and regulatory environment where it determines the renewal of contract. Based on BIMB research report, the management remains optimistic on the extension of e-government license which is to expire in May 2020. Because of this risk, when there is a changes of government in May 2018, Myeg share price limit down for 3 consecutive trading days where the price peak at 3.03 and trough at 66 sen. Now is about 2 years from the incident and share price is at 1.18 which i will further discuss below my thoughts as buying at 66sen would be taking a "gambling perspective" and buying now will be supported by much more data and information.
With unfavourable incident happening, we can see how competent management react to it:
1) In Sep 2018, Myeg report a 97mil loss in quarter report as there is abolishment of GST and management have to provide impairment for it where a total of 170mil is impaired and 20mil deferred sales is recognized which bring a net impact of 150mil in impairment loss. It is when management state in prospect that "Board is confident that there will be opportunities available to the Company to roll out similar system in other countries which we are present and to re-deploy the system built and assets purchased (which the value have been impaired) in these countries." This has successfully been done as announced in 14 January 2020, Myeg associate company in Indonesia secures additional mandates to roll-out its tax monitoring system to 30 more cities after pilot it in Jakarta. This show management have strong capability to walk the talk and use the system that value have been impaired to bring in more revenue in the future by expanding to other geographical present. Nevertheless, what is the chance that GST will be re-implemented in Malaysia since 160 out of 195 countries in the world that have GST? If that happens and Myeg is still appointed to provide the tax monitoring system, there will be chance to reverse the impaired amount in book and bring in more revenue in the future.
2) Management expand their services to oversea - Indonesia, Philippines and Bangladesh. Although all this is still in initial phase, can see that management is taking action to reduce their risk depending on single government. Some key milestone in oversea expansion is successfully launched online insurance portal in Philippines (Jan19), enters into an investment agreement with Jingle Magic (Beijing) Technology in the development of virtual reality, augmented reality and artificial intelligence-based education equipment and software (Apr19), subscription of PT Cartenz share though Myeg Indonesia (Jul19) then launch tax monitoring system in Indonesia (Jan20) and launches first phase of digital e-Government services in partnership with Land Bank of the Philippines (Nov19).
3) Covid-19 outbreak caused fear in the market, however Myeg ride the trend and developed an extensive Artificial Intelligence-powered Coronavirus risk profiling system, with capabilities that include historical geolocation and anomaly tracking for Chinese travelers, and is now making the technology available to the governments of Malaysia and the Philippines. This announcement had been made on 19 February 2020 which show that in less than 2 months, the management is able to react and do their part to help the country they serve.
4) Myeg just released a historical high PAT of 69mil a week ago, this also show management ability to maintain their business value despite a big changes in operational environment.
Additional note: With present in more countries, believe that Myeg can achieve even better margin as they can just made modification to existing system if similar system is needed in different country (instead of developing a new system).
Conclusion: Myeg current share price is 60% lower from peak, trading at PE16 and PAT is growing at double digit. Management is also doing a great job in expanding the business to oversea. Founder Wong Thean Soon with his private company Asia Internet owned 30% of the company and is said to have "skin in the game". It is also one of the rare stock that able to grow exponentially in profit together with share price if holding since 10 years ago. However, do note the really high risk of political and regulatory environment they operate in.
Disclaimer: The above serve as a case study and is not a buy/sell call.
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