By Shak Chee Hoi on March 28, 2019
MY E.G. Services Berhad (MYEG) is a home-grown technology company that has been listed on Bursa Malaysia since 2007. It provides a wide variety of electronic government and commercial services including renewal of foreign worker work permits, road tax renewals, and auto financing. MYEG also runs MyMotor – an online car marketplace.
MYEG had been an analyst and investor favourite for many years as its share price rose precipitously from 2013 to 2018. However, its share price plunged more than 70% after the 2018 Malaysian general election to hit a low of RM0.66 at one point, from RM2.58 just a day before the election.
As a significant portion of its revenue is generated from government contracts, MYEG is perceived to be closely linked with Barisan Nasional, the former governing federal coalition of Malaysia. So how is MYEG faring nearly one year after the new Malaysian government was elected? I made up my mind to attend the AGM of the company that often becomes the topic of table talk among investors in Malaysia.
Here are 10 things I learned from the 2019 MYEG AGM:
1. Revenue increased 51.5% year-on-year from RM371.2 million in 2017 and reached an all-time high of RM562.3 million for financial period 2018 (FP2018). FP2018 comprises 15 months from 1 July 2017 to 30 September 2018 as MYEG changed its financial year-end from 30 June to 30 September.
2. Net profit decreased 37.0% from RM200.0 million in FY2017 to RM126.0 million in FP2018. The noticeable decline is mainly due to impairment owing from an associate company amounting to RM95.45 million and impairment of equipment amounting to RM76.29 million. The impairments were related to the investments and capital expenditures incurred from the online tax monitoring system which was supposed to be launched under the now-abolished Goods and Services Tax (GST) regime. Nevertheless, MYEG still owns the impaired but functional assets and systems. It will seek to redeploy them in foreign markets where they are present, namely the Philippines, Bangladesh, and Indonesia.
Source: MYEG Services 2019 annual report
3. A shareholder asked about MYEG’s local and foreign growth prospects as the company incurred a loss of about RM720,000 from its overseas business. Managing director Wong Thean Soon shared that MYEG has to grab market share first before fully monetising potential opportunities in overseas markets. MYEG will prioritise reinvesting its income to gain market share rather than generating profits as opportunities can be monetised more effectively thereafter. MYEG will replicate what was done in Malaysia in overseas markets. In general, MYEG is hopeful and ‘very optimistic’ about its prospects in both local and foreign markets. Wong also stated that revenue contribution from foreign markets will grow to the same size as Malaysia’s within three years.
4. The Philippines is a relatively more mature market for MYEG compared to Indonesia and Bangladesh. Existing operations in the Philippines are revenue-generating and it took MYEG 18 years to get into the market. MYEG offers several e-government services including the issuing of National Bureau of Investigation clearance certificates. MYEG also partners with CIMB to offer loans to seven million creditworthy working adults in its user database in the Philippines. MYEG earns a percentage of the profit for every loan delivered. CIMB provides the capital and banking license while MYEG markets the financial products. MYEG is also pitching for a few government projects that helps collect tax and reduce tax leakages in Bangladesh. It is at the early investment stage and MYEG has no revenue-generating operations there for now.
5. MYEG signed a memorandum of understanding (MoU) with PT Cartenz Technology Indonesia to enter Indonesia’s e-government services arena. MYEG will invest $10 million in Cartenz, an e-government service provider in Indonesia, for a stake of up to 40%. The MoU aims to expand Cartenz’s tax monitoring system installations from 5,000 to one million outlets in the next few years. It is a competitive market in Indonesia as plenty of money is flowing into start-ups, and it is literally impossible to sell the system to local governments as products and services are provided for free at the moment. MYEG will take a different business approach in Indonesia by raising funds from external investors (private equity and venture capitalists) and provide the local governments with services for free in order to obtain market share. The roll-out progress is forecast to accelerate as Cartenz no longer solely depends on government revenue. MYEG needs to capture market share in Jakarta within the next two years in order to remain competitive in the market.
6. A shareholder asked why MYEG hesitated for more than a month to pay RM6.41 million to the Malaysian Competition Commission (MyCC) with regards to its infringement for ‘abusing its market position for the renewal of temporary employment permits for foreign workers.’ Wong explained that they did not agree with MyCC’s initial penalty of RM9.6 million. MYEG challenged and agreed to pay the reduced amount after MyCC accepted the changes MYEG made to its online visa renewal system for foreign workers.
7. The same shareholder questioned the large number of share transactions executed by the board of directors and the company. Regarding the vast changes in the number of treasury shares over the past six years, Wong explained that shares are bought back when the board ‘feels’ the share is underpriced, and the treasury shares are then sold to the market when the price recovers. Another shareholder mentioned market rumours that Wong’s shares were related to a former prime minister of Malaysia and his wife. Wong replied that ‘shares in my name are mine’ which led to a round of hesitant laughter among shareholders. He believes that MYEG is relatively established and its large size buffers them against geopolitical risks.
8. MYEG invested RM9.2 million for a 3.1% stake in Guangdong Virtual Reality Technology Co., Ltd (Ximmerse) in 2018. Ximmerse is a Chinese company that develops mobile augmented reality (AR) and virtual reality (VR) hardware, and attracts prominent investors such as Lenovo Group. Wong believes in two core disruptive technologies, namely blockchain and extended reality (XR — a collective term for AR and VR). While XR technology is not yet mature and currently limited to entertainment, he foresees the uptake of XR technology in the manufacturing and education sectors in the future. MYEG typically invests less than 5% stakes in leading start-ups in respective fields. This way, MYEG can keep up with the latest industrial trends and tap on entrepreneurial talent in start-ups.
9. MYEG is incubating a number of new products and services related to foreign workers. PayMe, a payroll management software that runs on blockchain technology was developed in 2018 as a solution to ensure foreign workers receive their salaries in full and in a timely manner. Guidelines related to initial coin offerings are expected to be finalised by the Securities Commission Malaysia by the second quarter of 2019. Wong highlighted that their foreign worker accommodation programme has been put on hold while pending for more direction from the government on its foreign worker policy. MYEG leases three sites in Malacca that currently operates as foreign worker hostels. Wong is not too worried that the replacement of foreign workers by automation will disrupt MYEG’s business as Malaysia continues to rely heavily on foreign labour for 3D (dirty, difficult, and dangerous) jobs. MYEG also acquired a 23.5% stake in Stampede which is valued at RM10.4 million. Stampede operates an online debt collection system with a 90% market share in Malaysia. Wong intends to conduct an initial public offering for Stampede in 2020 if it continues to do well. Similarly, Wong also considered spinning off the foreign workers accommodation programme as a listed entity or REIT at the previous year’s AGM.
10. MYEG distributed 1.9 sen in dividend per ordinary share in FP2018, an increase of 11.8% from 1.7 sen in 2017. The company has an unwritten policy of maintaining a 30% dividend payout ratio. When shareholders asked whether MYEG would further increase its dividend, Wong shared that most technology companies in the United States reinvest their profits in their companies for growth, which is also preferred by fund managers. Similarly, MYEG needs to retain a portion of its profit for reinvestment.