MYEG’s new sukuk issuance attractively priced at 5.65%.

We have introduced MYEG and their previous issuance in the article MYEG’s new 3Y MYR sukuk at IPG of 5.6%.  In this article, we will provide an update on their credit and look at the possible impact from the implementation of NIISe.

Table 1: MYEG Profitability

MYEG has so far maintained very profitable with stellar net profit margins recorded in 1Q24 of 67.7%. Revenue saw a 34% jump, largely contributed by their new blockchain platform, Zetrix which contributed around 30% of 1Q24 revenue from token sales.

We expect revenue from commercial services and concessions services to remain flat in the future, due to increased digitalization and stiff competition. The auto insurance renewal market has seen entrance from various players such as Bjak and Touch’n Go, while insurance providers are also going digital by providing renewal through their own website. Furthermore, JPJ has also recently introduced online renewal of license and road tax. Nevertheless, as of FY23, their revenue generated from commercial based services continue to remain resilient, with a YoY increase of 9% from RM 517 million in FY22 to RM 565 million in FY23.

Minimal impact from implementation of National Integrated Immigration System (NIISe)

MYEG once started solely as a concessionaire for e-Government services, generating the bulk of their revenue by providing services such as road tax, license renewal and foreign workers permit renewals. Because of that, concerns surrounding MYEG’s future earnings surfaced, following the news that the immigration department plans to revert back all immigration related affairs through the implementation of the NIISe.

However, the implementation of NIISe is expected to delay further from its targeted implementation in 2025 as the project has yet to be awarded after the termination of contract with Iris Corporation in August last year. Owing to that, MYEG has received an extension for their services for an additional 2 years, up to July 2026, providing some earnings visibility throughout the term.

Nevertheless, we opine that, unlike the past, MYEG has meaningfully expanded their offerings and diversified their revenue source away from solely relying on the revenue from concessions. They have managed to achieve this by offering ancillary and commercial based services that complements its existing technology and concessions-based business. This includes services such as auto insurance renewals, foreign worker insurance and foreign workers job matching services. Other revenue sources include rental income derived from their foreign workers dormitories and their interest income from their financing receivables of which they provide auto financing and loans to businesses.

To provide more information on their ancillary services for foreign workers, involving foreign workers insurance and job matching, it is estimated that it contributes to roughly 30% of revenue in FY23 . We remain optimistic on this revenue source as we believe it to continue to remain stable, supported by the 2.8 million foreign workers documented in Malaysia in 2023 increasing from 2.2 million a year earlier as published by the Department of Statistics Malaysia.

Overall, we expect minimal impact from the implementation of NIISe, with estimated loss of revenue at around 10%  to be conservative, based on their revenue from concessions in FY23. As such, we expect earnings to continue to be supported by their ancillary and commercial based services, especially from the services related to foreign workers in Malaysia.

Chart 1: MYEG FY23 Revenue Breakdown

Foray into new services via Web3-based solutions

MYEG revenue growth has so far been contributed by their new Zetrix blockchain platform services, with 30% of 1Q24 revenue contributed by their sales of Zetrix token. To briefly introduce Zetrix, it is a layer-1 public blockchain that facilitates smart contracts and is integrated with China’s national public blockchain Xinhuo BIF to facilitate global trade. Through Zetrix, MYEG has launched a decentralized application, ZTrade, aiming to allow for a more seamless cross-border trading experience, facilitating trade between Malaysia and China. MYEG is looking to earn fees for the services provided by Ztrade, with information on their website indicating a fee of RMB 1400 (MYR 875) for registration and RMB 200 (MYR 125) to upload one CO.

On the other hand, management has further explained that the Zetrix tokens serves as a utility token for the platform, which is required for the payment of ‘gas fees’ to execute and complete transactions.

Overall, we still remain cautious on their blockchain segment, mainly because currently, revenue generated from this segment is predominantly from token sales to investors and is subjected to investors sentiment and overall demand for the token. Secondly, the business is still nascent and little is known about the adoption rate and eventual successful implementation of Ztrade in cross border trading with China.

Table 2: Credit Profile

MYEG has increased their overall debt, mainly tapping the sukuk market for financing with a total outstanding issuance of RM 880 million so far. Despite increasing debt, we remain positive on their overall credit profile, underpinned by their strong CFO which provides ample liquidity to service debt and their current significant holdings of cash amounting to RM 537 million and additional digital assets consisting of stable coins USDT and other cryptocurrencies of RM 300 million which we believe to be very liquid.

We expect capital expenditure in the form of development cost to develop their web3 services to continue to be elevated in FY24 at around RM 250 million. This will be supported by the cash generation from their core business and further token sales to investors.

Thoughts on the new issue

Considering spreads in the Malaysian bond space have generally tighten, we believe the new 3 year MYEG issuance is attractively priced at an IPG of 5.65%, especially since it is rated AA- by MARC. Spread wise, it is issued at ~ 240bps above the benchmark MGS, which is commensurate with issuances with credit rating A to A-.

Overall, we believe investors can consider the new issuances from MYEG, given their ample liquidity and strong cash flow.