MyEG sees improved earnings but bleak outlook ahead

KUCHING: My EG Services Bhd (MyEG) whose stock price has taken a huge battering of circa 70 per cent since the 14th General Elections (GE14) has posted improved earnings for its third quarter of financial year 2018 (3QFY18) but analysts reckon that the stock is still in for a bleak outlook.

For 3QFY18, MyEG reported earnings of RM58.6 million which translates to an increase of 8.6 per cent year over year (y-o-y).

This improvement was mainly attributed to a higher transaction volume of foreign worker permits, foreign worker rehiring program services and foreign worker insurance; the introduction of foreign worker job matching and placement program which commenced in 2QFY18; and the increase in revenue contribution from motor vehicle trading services.

Cumulatively, this brought 9MFY18 earnings to RM169.9 million –- a 19.7 per cent y-o-y improvement but still slightly below expectations as it only met 66 per cent of consensus’ full year FY18 earnings estimates.

According to the results review, the research arm of MDIF Amanah Investment Bank Bhd ( MIDF Research) guided that MyEG is currently reaping healthy profit margins of more than 50 per cent due to its foreign worker job and placement matching program and hostel accommodation business.

The improved earnings and healthy profit margins are a silver lining to its recent steep drop in the equities market but despite it all, MIDF Research said MyEG’s outlook is still bleak as they expect future profit margin compression in view of the government’s implementation of open tender exercises as a policy to improve corporate governance and minimise costs.

“We are adjusting downwards the contribution from across all the business segments to better reflect the results thus far,” said the research arm.

“In addition, we also remove the contribution from GST which we initially expect to come into effect in FY19. As a result, FY18 and FY19 earnings forecasts have been revised lower by 11.1 and 59.2 per cent respectively,” they added.

MIDF Rersearch believed that the change in business landscape has prompted both Employees Provident Fund (EPF) and Kumpulan Wang Persaraan (KWAP) to substantially reduce its stake in the group.

With all factors considered, MIDF Research has decided to reiterate their neutral rating on the stock with a revised target price to RM0.81 from RM2.47.

“This is premised on FY19 EPS of 3.8sen per share pegged to FY19 forward PER of 21.3-fold from previously 26.3 fold. Our target PER is one standard deviation below its three-year historical average,” guided the research arm.