My EG Services upgraded to Buy by UOB KayHian despite Malaysia political risks

Malaysia one-ringgit noteMalaysia one-ringgit note

UOB KayHian upgraded My E.G. Services to Buy despite the political risks facing the company after Malaysia’s new government moved to scrap the goods and services tax (GST), which would likely end its monitoring contract.

“MYEG’s risk-reward profile has turned positive with share price having plunged 65 percent over the past few days,” the brokerage said in a note on Friday. “The risk of its GST monitoring system being scrapped has been fully discounted, and more importantly, we foresee the concession of its efficient e-government portal being continued.”

Additionally, while the GST will go to zero percent on June 1, it was expected to be replaced with a sales and services tax (SST) eventually, the brokerage noted.

“While MYEG’s earnings growth is dampened by the repeal of the GST monitoring system, we believe that the existing infrastructure could possibly be recalibrated/deployed for SST in the future, given that the tax monitoring system essentially aims to facilitate the customs department’s tax collection and curb evasion,” it noted.

In a worst-case scenario, MYEG could lose its monopoly in e-government concessions, while its added-on services could face an open tender threat, the brokerage said, adding that assuming a 30 percent market share loss each in its e-government and added-on services, the company’s fiscal 2019 and 2020 core net profit would fall by 29-39 percent.

But for now, UOB KayHian said it expected MYEG would get an extension for its e-government services when the concession expires in 2020 due to high barriers to replicating its deep-rooted infrastructure and database.

While ti cut its target price to 1.06 ringgit from 1.97 ringgit on “fluidity of sentiment,” it noted that the stock is trading close to its assessed trough valuation of 0.84 ringgit.

The stock ended Friday up 2.21 percent at S$0.93, compared with levels around 2.58 ringgit before the election; it was off its post-election low of 0.89 ringgit.