Highlights:
- MYEG was in the spotlight following news from the immigration department that they intend to revert back all immigration related affairs back to the department by 2025.
- On July 2023, the Ministry of Finance has approved to extend MYEG role as the provider of online services for the Immigration Department of Malaysia. The renewal is expected to be for another three more years.
- The transport minister on May 2023 has announced the extension of MyEG services with road transport department (JPJ) for another 3 years.
- MYEG revenue from concessions-based service is estimated to be less than 25% while the other 75% is from non-government related services.
- We think that the default risk for this 3-year sukuk is under control. Hence, investors that are able to stomach a higher risk can look at MYEGMK Jul2026 Corp (MYR) with a yield to maturity of over 5%.
Background
MYEG is a concessionaire (official permission from a government to do business in a particular place) that provides various e-government services to the Malaysian citizens and businesses. The corporation builds, operates and owns the electronic channels that they developed for the online government services. Beyond Malaysia, MYEG has operations in other markets like the Philippines, Indonesia and Bangladesh. The new issuance is senior unsecured and rated as AA- by MARC.
Its co-founder Mr Wong Thean Soon holds 28.1% stakes in MYEG through direct and indirect interest as at 28 July 2023. This is followed by Malaysia’s public sector pension fund for civil servants (KWAP) with a holding of 7.5% and CIMB Group with a holding of 6.8%.
In the spotlight
MYEG was in the spotlight a couple months ago following news from the immigration department that they intend to revert back all immigration related affairs back to the department by 2025 via the implementation of national integrated immigration system (NIISe). This is unfavourable to MYEG operation.
Extension of immigration related services & road transport department services
Nonetheless, the Ministry of Finance on July 2023 has approved MYEG to be appointed as the collection agent for Government revenue as well as extending its role as the provider of online services for the Immigration Department of Malaysia. This is because the new system NIISe won’t be ready anytime soon. Having said that, the terms of the renewal will be formalized and finalized pursuant to further discussion with the government. The renewal is expected to be for another three more years.
On top of that, the transport minister on May 2023 has announced the extension of MyEG services with road transport department (JPJ) for another 3 years. However, it is to note that MYEG no longer owns exclusive rights in this contract renewal. This signifies that if there are other merchants that would like to provide e-government services for JPJ, JPJ will deliberate on it.
Nevertheless, these developments are a boon for MYEG and its bondholders as these new extensions should provide revenue coverage for MYEG throughout the tenure of the new bond issuance.
Potential delay in the deployment of NIISe
The National Integrated Immigration System (NIISe) project is launched in 2021 with the aim to replace MyIMMs (MY E.G. immigration system) by Aug 2025. Iris Corporation was engaged to deliver the project with the original contract commencing from March 2021 until Aug 2025. However, the contract is recently extended for another year until Aug 2026.
This is likely due to the project not achieving adequate progress as commented by Home Minister Datuk Seri Saifuddin Nasution Ismail. The home minister has further updated in May 2023 that the NIISe project is still in the requirement study and design phase, which is in its 27 month since the project started on March 2021. All these developments seem to bring to the notion that the deployment of NIISe software is likely to be delayed.
This is a positive news for MYEG as it should allow them to maintain its status quo as immigration e-service provider for longer.
Revenue from concessions-based service is estimated to be
less than 25% of total revenue
While MYEG is perceived to be highly dependent on government concessions, however MYEG revenue from concessions-based service is estimated to be less than 25% while the other 75% is from non-government related services. For instance, under the foreign worker concession services, MYEG not only provides foreign worker permit renewal that is associated with government service, it also provides other services not covered under the concession such as foreign worker insurance, foreign worker dormitories and job matching.
Table 1: MYEG's foreign worker services
|
Government concession service |
Non-government concession services |
|
Foreign worker permit renewal |
Foreign worker insurance |
|
Foreign worker dormitories |
|
|
Job matching and placement |
|
|
Source: The Edge, data as of 31 July 2023 |
|
Hence, these ancillary (supporting) services will marginally mitigate the loss in earnings if the government of Malaysia does terminate MYEG as their e-government service provider. We are projecting a loss of 20-25% in revenue if MYEG loss their anchor service (e-government service) for the sake of being prudence.
New business opportunities
MYEG has devoted significant effort and capital (CAPEX) into its blockchain venture via its blockchain platform, Zetrix. Not long ago, MYEG has signed a partnership agreement with a wholly-owned agency of Customs of the People’s Republic of China to jointly provide a full suite of cross-border trade facilitation services that includes certification of origin. Zetrix platform will allow product traceability, tariff computation and supply chain financing. The scope of the agreement covers international exports going into China.
That brings us to an announcement hot off the press where MYEG has entered into a collaboration with Philippines’ Bureau of Customs to deploy Zetrix platform for trade flows between Philippines and China. This demonstrates the ambition MYEG has in playing a role in facilitating international export going into China. While the possible revenue contribution from this venture is still widely unknown, the development we are seeing in this new venture is upbeat to say the least.
Other than that, there’s also a couple of MYEG projects that are worth looking into, such as automated training and driving test system, expansion in foreign worker hostels and e-government services for Philippines government.
High operating profit margin; low debt to equity ratio
In 1Q23, MYEG posted a revenue of RM173 million, higher than 1Q22 by 7%. However, on an annual basis, revenue did fell from RM722 million in FY21 to FM651 million in FY22 due to low demand for its quarantine services. Operating profit margin remains high at an impressive 68.8%.
Table 2: MYEG's profitability
Credit profile wise, MYEG recorded a RM138 million in cash flow from operations for 1Q23, which is 1.5 times higher than 1Q22. It also has a cash position of RM215 million that is able to cover its short- term debt of RM159 million. Free cash flow for 1Q23 is positive, but it is to note that MYEG has registered a negative free cash flow of RM218 million in FY22 (FY21: - RM197 million) due to the substantial amount in CAPEX.
As for gearing ratio, MYEG has a rather low DE ratio of 0.29 and net DE ratio of 0.17 in 1Q23. This is primarily due to the huge amount of share capital and large reserve in retained earnings. In terms of financial ratios per se, MYEG is fairly healthy.
Table 3: MYEG credit ratios
Our view
With the contract extension in both immigration department and road transport department e-government services, potential delay in the deployment of NIISe and revenue from concessions-based service estimated to be less than 25% of total revenue, we think that the default risk for this 3-year sukuk is under control. Hence, investors that are able to stomach a higher risk can look at MYEGMK Jul2026 Corp (MYR) with a yield to maturity of over 5%.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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