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1. MYEG Business Overview
MYEG Services Berhad and its Group of companies (also known as “MYEG” or “the Company”) is principally engaged in the business of development and implementation of Electronic Government (e-Government) services and the provision of other related services for the e-Government Initiative. Basically the Company builds, operates and owns the electronic channel to deliver services from various Government agencies to Malaysia citizens and businesses. The Company vision is to "be a high value added provider of global competitive IT services".
The main customers of the Company services includes our Dewan Bandaraya Kuala Lumpur ("DBKL"), Jabatan Insolvency Malaysia ("JIM"), Jabatan Pengangkutan Jalan ("JPJ"), Polis Diraja Malaysia ("PDRM"), Jabatan Pendaftaran Negeri (“JPN”) Tenaga Nasional Berhad ("TNB") and Telekom Malaysia Berhad ("TMB").
A. Government e-Services
The Business can be further breakdown into the following categories:
1. PDRM/ Royal Malaysia Police – Yes. Those that don’t know what they offered here; it means you have been a good citizen. Keep it up. Basically, they have established and managed a platform to facilitate and allow us to make payment our summons (i.e., Ang Pao) to PDRM.
2. Road Transport Department/ JPJ – Within this platform, it allows customers/ users to perform road tax renewal, Learner’s Driving License (“LDL”) Application – You are able to allow your kids to learn how to drive by applying the application by using their platform in which they would require you to make the necessary payment and showing sufficient documentations for them to assist and proceed with the application. On top of that, users are able to transfer vehicle ownership either temporary or permanently and perform insurance renewal as well within their platform.
3. Immigration Department of Malaysia – Users (both Company and Individual) will be able to renew their foreign worker or maid permit through online by accessing their platform. They will assist from end-to-end process whereby once they have completed the verification and documentation process, the permit will be delivered to your address without you collecting it at the office.
4. National Registration Department/ JPN – This service is only applicable to all Malaysian citizens who already own a MyKad or known as IC. Within this platform, users will be able to apply to replace their MyKad; due to damage, normal replacement or loss of your MyKad., collection of your MyKad and also apply for MyKad process.
5. Bankruptcy and Liquidation Search/ JIM – The company allows the public to identify the bankruptcy status of individual and liquidation status of companies as well.
To sum up basically, they are probably one of the largest company in Malaysia to provide a one-stop solutions (Note: Picture below is for illustrative purposes only):
Basically, it's known as a One-Stop-Solution as the platform allows the customer to apply their driving license, applying foreign workers permit/ maid permit all the way to renewing our MyKad and paying summonses. On top of that, the Company has been diversifying their traditional business (eGovernment Services) to e-commerce and healthcare services business by leveraging on the existing data. Hence, the competitive advantage that MYEG has compared to other peers is “Data”. The more users/ customers use their platform, they will be able to capture more data and perform analytics on customer behaviour.
As one can imagine, if the Company were to utilize the data efficiently (i.e. by collecting all the customer data, conducting analytical analysis using Big Data and churning out the dashboard to understand the overall picture of customer behavior and attributes), there are much more that the Company could do to monetise the data that the Company has.
B. Others – Business Growth and Recent Development
Some of the notable development in the past 1 year can be summarized in the below timeline:
B1. Others - Investment in AI Technology
In 2021, the Company had participated in a recent Series A financing by
Beijing DeepScience Technology Ltd (also known as “DeepScience”), a
leading virtual live streaming, real-time animation and digital human
company. More about DeepScience Company, it was founded by David Cheng
in April 2016 in Beijing, which focus on full-stack real-time animation
and virtual live streaming technologies and digital human-computer
interactions functions. Few key business breakdowns that we can learn
more about this company:
(i). Human-Computer Interaction (also known as HCI) – HCI basically study of how computers and machines can serve humans or us better. It sounds extremely simple or extremely complicated/ confusing. But in essence, what it really means is that, it enables our machines/ devices (i.e., computer, playstation, WII, to a certain extend keyboards, smartwatch, VR, etc.) to serve us better. In layman, it’s the enhancement of IOT around us so that they can best serve us in our daily life from assisting Companies to work more productively to individuals become lazier (robotics to assist us to communicate, wash the plates, etc.). Some examples of Human Computer Interactions (HCI). The famous Christopher Latham Scholes who invented “QWERT” or also known as the creator of typewriter. Basically, such design was paired with each other so that the letters will unlikely often paired or jam or knock each other.
DeepScience basically produces two products which is known as DM Lite and DM PLUS for professional-level video producers and DM Easy for livestreaming. Example of one of AI livestream and how it looks like for visualization purposes.
Toward this end, DeepScience has created some barrier to entry to
ensure long-term sustainable development of the enterprise. The first of
these is around intellectual property (IP), where DeepScience has
applied for 50 patents.
To date, DeepScience has already served many well-known IPs in China such as Yichan Little Monk, Momo Girl, Bud Bear and Jiangxiaoyu.
The above basically shows how the Company (Deep Science) is able to portray human AI and interact with the Customer in real-time. It is interesting to see what’s MYEG Management thought process (the thinking process behind one's mind) in their investment. If this pent out to be a suitable investment, they could bring the AI technology to the Malaysia market and leverage on their existing data or user base.
B2. Others - Growing presence in Healthcare Segment
In February 2021, the Company has developed an AI-powered Covid-19 virus risk profiling system. The system leverage on historical geolocation and anomaly tracking for travelers. The technology was made available to the governments of Malaysia and the Philippines. MyEGuard, a contact tracing and digital health profiling smartphone application which enables authorities to carry out in April 2020 through MYEG Philippines with pilot implementations of the application in selected cities.
Launching in November 2020, the Company developed MySafeTravel Digital Health Pass System for travelers designed to facilitate faster, simpler and safer entry into the country amidst the ongoing pandemic. In addition, the Company received a Letter of Acceptance (LoA) from the Ministry of Health on 8 October 2020 to undertake the provision of online payment of Covid-19 screening tests and quarantine charges for inbound travellers, both Malaysians and non-Malaysians. The project is aimed to enhance the administrative process for Covid-19 screenings and designating quarantine locations for travellers. The tenure of the project will be 2 years, effective from 1 November 2020.
On top of that, the Company in 2021 introduces the use of deep-throat saliva-based Covid-19 test kit in Malaysia the Philippines. Also, in February 2021, we introduced MySafeQ, an online portal which offers a slew of hotel accommodations available to low-risk Covid-19 patients who wish to proceed to perform mandatory quarantine. Eventually, the revenue contribution from this segment may not be their core business. However, that being said, within 1 year or less, the company is able to establish and creation of digital application to be in align with the current and upcoming trend.
B3. Others - Niche e-Commerce Space
The Company does understand and realise that they probably rely too heavily on government contracts (which could lead to heavy political uncertainty damage). Hence, they have been trying to move out (not entirely, as we will demonstrate in the financial segment whereby the Company has been resilient and the traditional business on government contracts do not rely heavily on their operating expenses as well as much capex) and diversify their revenue stream. The Company has set-up an online platform (call Nak Beli – access through here https://beli.com.my/) specifically to sell groceries, fresh fruits/ foods and as well as frozen foods. Rather than going into the crowded space (general e-commerce platform), this will allow the company to attract more niche customer which has only one aim when they visit the website to buy groceries.
B4. Onboarding blockchain innovation
The Company has been actively engaging with our SC and initial exchange offering (IEO) platforms to launch its own stable coins. They have mentioned that they plan to launch as early as June this year. The stablecoins that they plan to launch will be a new form of payment system for its various e-government and remittances services. We would love to see this to take place as the Company growth story and leverage on their previous database and customers/ users in monetizing this strategy.
B5. Replicating their traditional services (eGovernment) to other Countries – Growing Regional Footprint
This could be a good opportunity for the Company as they are eyeing to leverage on their current knowledge and proprietary technology to diversify into other markets (Indonesia, Bangladesh and the Philippines).
Overall the Company growth story remains robust and unique. However, if we were to compare to their growth story versus their current market cap of RM 7 billion and an annualized revenue of RM 400 to 500 million range, which the Company will be trading at a 13 to 15 Price to Sales range, it may seem as though they have been trading at their fair value. Of course, when it comes to government contract, the problem is that contracts are not “sticky” in business nature. When your potential, future revenue and growth is not “sticky”, it will be difficult to project the business growth of the company at a longer term horizon (5 to 10 years) and hence, may not look enticing to certain investors. But this should not be the concern of investors, as over the years, we can definitely evident that the Company has been able to adapt to the market quickly enough; especially how the Company is able to quickly transform and adapting to the current pandemic situation by implementation of digital services ease and help the general community.
The competitive advantage that the company has currently is customer (individual and company) data that they possess in which, if they continue to monopolise this market without strong competitors jumping in, we don’t see why the government will revoke or not renew their contract. Simply because, it will be hassle to the public to switch or have multiple accounts in multiple platform which is serving the same purpose. On top of that, they will be able to leverage on the data to perform data analytics and further understand the customer behaviour. This could pose a very huge competitive advantage and growth story for the Company should the Company manage to leverage on this data effectively. Elsewhere, the group is eyeing a role in the design / implementation / integration of the government’s vaccine passport system.
Definitely, there is plenty of room to grow within the Company and many Investors would always brand them as not to get too sensitive here (to be careful in the choice of words we used here) “Reliance on Government Contract”, we can observe that the Company obviously understand where the problem lies and this is where the Company has been developing innovative plans/ blueprint for the Company to grow organically without relying sole on contracts. Like it or not, the Company is in a very well position to grow their digital services businesses and relying less on the eGovernment services business due to their existing and years of technical capabilities.
2. Financial Perspective
(i) Quality of Profit
For those that have joined our courses would understand easily what we are trying to portray in this graph (those wish to learn more can visit https://learn.jawplace.com/course/investing-with-conviction/). Seems complicated, but it’s pretty straightforward. In essence, for the past 6 years, the company has been able to generate more cash than what they have actually earned. It is a whole topic that investors should learn how to analyse quality of income and how can company generate more cash than they earn rather than analyse profit and EPS on a stand-alone basis.
If you recalled what we mention in our earlier post, the company is in a scalable position and operating in a asset-light model where they don’t require huge expenses (fixed cost) to sustain their revenue and profit. Hence, the Company has been able to maintain their Profit Margin of above 45% (only for one year in 2018 it drops to 22%). Although the company operating expenses has been declining, they were able to continue generate consistent revenue growth, cash flow growth and profit growth. Let’s analyse in percentage term and we will better understand how the Company has position themselves in an asset-light business strategy:
Nothing dodgy that we can observe here as the relationship between capex, expenses and revenue growth are correlated. However, as we can observe that over the years, capex has been quite stagnant except for the spike in 2016. The company has been able to maintain their revenue and profit with minimal increment in their capex and expenses as this was explained earlier in the company business model.
As the Company focus to enhance and build their platform, the more users register, the more product offering they offered, the more contracts the government will require to award them; hence the company will be able to increase their profit margin with minimal incremental in their capex and opex.
In Peter Thiel’s Book “Zero to One”, he advocates on the advantage of monopoly business if the Company the following characteristic: Proprietary Technology, Network Effects, Economies of Scale and Branding. We will leave this topic for another day.
What we can observe from the analysis above is that out of the 6 years, the Company has been operating in a net cash position except for 2017 and it was due to an increase in the capital expenditure. The Company cash position has been on an uptrend since 2017 with average CAGR of 11.30%, PPE CAGR is at 20.60 % and the Company Capex CAGR is at 2.43%. it kind of shows that the company does not require heavy investment on their Capex to grow the value of their business. However, one thing for sure is the company will require heavy maintenance and services and probably legacy system will be an issue in the next 5 to 10 years should the company do not continue to innovate and maintain their back-end system.
Cash flow perspective (shown in the below chart), the Company has manage to consistently generating FCF for the past 3/4 years (excluding development cost/ maintenance, etc.):
|Debt to Equity||4.50%||26.80%||24.90%||22.50%||21.70%||15.00%|
Overall, the majority of the numbers look pretty good. One notable downside is the reduction in the Company Gross Margin. As we have mentioned early a few times within this article, the Company is looking into ways to diversify the Company revenue stream instead of relying solely on Government contracts. That being said, some investments will be required to diversify their revenue stream and hence it will impact their gross margin slightly; but notably it did not hamper the Company EBITDA margin which, they have managed to maintain consistently above 60% for the past 6 years (kind of crazy in terms of their margin).
Hence, definitely the Company current ratio has been in a very healthy position for the Company to perhaps take on more debt and expand to diversify their revenue stream more in which majority of the Investors should be focusing on and not relying on their existing Government contracts but the data that the Company possess.
The Company is currently a RM 7 billion market capitalization Company, a PE of 22, Price to Sales of 14/15 and by taking into account the “riskiness” in their growth prospect, one would argue that the Company could be trading at a high valuation given there are “certain” form of uncertainty. The Company is currently a RM 7 billion market capitalization Company, a PE of 22, Price to Sales of 14/15 and by taking into account the “riskiness” in their growth prospect, one would argue that the Company could be trading at a high valuation given there are “certain” form of uncertainty.
Personally, we should get more sense of how the Company can position themselves in the future and diversify their revenue stream. If they Company manages to achieve this, it could be a good opportunity for investors to “look” into this company.
3. The Ugly
(i) Government Contracts – As we have mentioned, as of this moment the Company still relies on government contracts (e-government services and immigration-related services) which is their bread-and-butter segment to justify their current valuation. Of course, without that Contract, the Company will not go bust. In addition, any slow down in the government budget/ expenditure to conduct open tender to award more eGovernment services contracts, it will impact the Company order book as well.
However, the Company is still in a very healthy position to incur more investment/ capex to diversify their revenue stream and perhaps to justify their current Market Capitalisation of RM 7 billion, a PE of 25, PS of 14. However, this could be a boon or bane for the Company as well. As the Company has been monopolizing the Malaysia market and given the amount of data that the Company possess, any newly government services (e.g., implementation of GST, etc.), the probability for the Company to get awarded will be higher as compared to their competitor due to network and moat effect.
(ii) Political Uncertainty - The Company has always be in a limelight when it comes to our Malaysian politics. We should not further speculate but back in 2018, when we had a change in Government, the Company share price drop from RM 2.58 to around 0.77 to 0.80 cents (70% decline in their value). Hence, investors who are invested within the Company should be aware of the risk involved.
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