MYEG’s new 3Y MYR sukuk at IPG of 5.6%

Highlights

• MYEG is a concessionaire (official permission from a government to do business in a particular place) that provides various e-government services to Malaysian citizens and businesses.
  
• Extension of government concession services provides some earnings visibility over the duration of the contract.
• Good progress with their expansion overseas into China with the deployment of their layer-1 blockchain and solidifying their position in Philippines as a one stop e-government service provider.
• A consistent profitability owing to an excellent profit margin and a decent credit profile with  moderate debt levels and good liquidity.
• Our views on MYEG remains unchanged from the previous article as their financials remains decent. Hence, investors can consider their new 3Y Sukuk with an indicative yield of 5.6%.   
  

Company background

To recap, MYEG is a concessionaire (official permission from a government to do business in a particular place) that provides various e-government services to Malaysian citizens and businesses. The corporation builds, operates and owns the electronic channels that they developed for the online government services. Beyond Malaysia, MYEG is expanding its presence in other markets, including Philippines, Indonesia and Bangladesh.

The ownership structure of MYEG has seen minimal changes since our last update. As of 19 February 2024, its co-founder Mr Wong Thean Soon maintains a significant stake of 28.9% stakes in MYEG through direct and indirect interest. This is followed by Malaysia’s public sector pension fund for civil servants (KWAP) with a holding of 7.2% and CIMB Group with a holding of 6.4%.

Extension of government concession services

Earlier this year, the future earnings prospects of MYEG came into scrutiny 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). Recent developments have seen a further delay in the NIISe due to a contract termination with the original developer and the reopening the tender for the NIIse 2.0 project.

Since then, MYEG managed to receive an extension for their immigration services to facilitate applications for temporary employment visit passes for foreign workers for an additional 2 years. On another positive note, the group has also recently managed to get their contract for JPJ extended for another 3 years. With both government concessions renewed, we believe this will be able to provide some earnings visibility for MYEG for the remaining contract duration.

Expansion overseas seeing good progress

MYEG has made significant progress in their move to diversify revenue base by expanding in China and Philippines. In October last year, they successfully completed their Initial Exchange Offering (IEO) of Zetrix selling around 5 million tokens at a price of USD5 per unit. To briefly introduce Zetrix, it is a layer-1 public blockchain that facilitates smart contracts and is integrated with China’s national public blockchain Xinguo BIF to facilitate global trade. In a recent filing, MYEG announced a partnership between Web3Labs Hong Kong and Summer Capital to establish Zetrix as the preferred blockchain infrastructure for Hong Kong government-aligned applications. With the deployment of Zetrix and their platform, MYEG is expected to continue to grow their Decentralized Finance (DeFi) segment to further support cross-border transactions and generate revenue for MYEG.

In the Philippines, MYEG has also further solidified their position as the one stop e-government service provider with the announcement of their partnership with Social Security System of Philippines (SSS PH) to further enhance the payment experience for SSS PH members through online payment of loans and contribution with MYEG PH’s website. Other services provided by MYEG in the Philippines include online premium contributions payment (PhilHealth), online tax payment (BIR) and online travel tax services system (TIEZA) among other services.

MYEG Profitability

MYEG profitability has remained consistently profitable so far with their revenue for 9M23 increasing by 13.5% YoY to RM552 million and recording a net profit of RM337.5 million, representing a net profit margin of 61%. The increase is mainly contributed by their Zetrix blockchain platform and the sale of Zetrix tokens. Management has also alluded to a strong token sale following this IEO, which will be expected to deliver a stronger performance in 4Q23.

MYEG’s credit profile

The credit profile of MYEG remains good with a gearing and net gearing ratio at 40% and 21% respectively, representing low leverage levels. With their planned RM200 million issuances of their sukuk, we expect gearing to rise slightly to 49% which is still acceptable. They also remain sufficiently liquid as short-term borrowings of RM141 million in 9M23 is sufficiently covered by their cash of RM398 million. Their consistent generation of a positive cash flow from operations also further supports their liquid position, generating RM321 million in operating cash flow in 9M23, covering their interest expense by 11 time. As such, we remain positive on the credit profile of MYEG underpinned by their ability to generate a positive operating cash flow and their low leverage levels.

Our Recommendation

Our views on MYEG remains unchanged from the previous article owing to their excellent profit margins and decent credit profile. Their outlook remains positive with their expansion in China through their DeFi segment which is expecting to drive the group’s earnings growth. Hence, investors can consider their new 3Y Sukuk with an indicative yield of 5.6%.

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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