MyEG to roll out new services

MyEG Services (45.5 sen) recently held an analysts' briefing to outline its expansion plans. The company is Malaysia's dominant e-services provider, providing a wide range of government-to-citizen (G2C) services — particularly with the Road Transport Department (JPJ).

To recap, MyEG reported good growth in revenue and profitability in FY09 despite the recession, heavy capital expenditure (capex) and advertising spending. This was due to increased volume for its road tax renewal service and insurance premiums, which helped to offset lower JPJ driving tests earnings. Revenue for FY09 increased 19.8% to RM52.5 million, pre-tax profit increased 16.8% to RM17.3 million and net profit rose 16.4% to RM17.2 million.

Expansion plans
MyEG's future growth will be anchored by several factors:
1) The road tax renewal service and ancillary motor insurance premiums, which are rapidly gaining market share
2) Increasing network coverage, with its expanding number of e-service centres and e-service kiosks, particularly in Sabah and Sarawak
3) New products and services in the pipeline. The most important of these will be the proposed customs sales and service tax initiative

Road tax renewal service
Launched in April 2008, the road tax renewal service is the main driver of MyEG's growth over the near term. The company has two main business models for the new service — an online and a kiosk-based one. Both services have been very well received.

For the kiosk-based service, MyEG has signed up a number of financial institutions and placed a kiosk in selected branches of the financial institutions. These kiosks provide MyEG with an additional network and customer base, and enable financial institutions to offer a value-added service.

MyEG is also increasing the kiosk reach via its own e-service centres, which offers customers the option to print the road tax discs directly.
The online service currently attracts well over 2,000 transactions per day, and the number of ancillary motor insurance premiums sold daily has also increased to over 100 daily.

According to the company, it now has a market share of about 15% of total road tax transactions for passenger cars issued daily, and is also the single biggest independent insurance agent, by the number of policies issued. This service contributed 10% to revenue in FY09.

Expanding market presence
MyEG's physical network — comprising e-service centres and e-service kiosks — has grown very rapidly, from expansion as well as the acquisition of MySpeed in 2007. The company is increasing it further — particularly in Sabah and Sarawak.

The e-service centres cater largely for the JPJ driving licence theory tests, which are conducted online at the e-service sites. The e-service centres also hold a number of e-service kiosks, for online transactional services and now, the specialised kiosks for the road tax renewal services.
From 19 e-service centres in FY04, the number grew to 26 centres in FY05, 27 centres in FY06-07, 54 centres in FY08 (after including MySpeed) and 65 centres at end-FY09.

Another 33 centres are under CONSTRUCTION []. This will bring its network to 98 e-service centres by next year. Each service centre requires two kiosks, one for printing driving licences and the other for the road tax service. The company estimates capex for FY10 at RM12-RM15 million, excluding those for new services.

Pipeline of new services
Apart from broadening its market reach, MyEG has been widening its product range. From four service suppliers in FY04, it now has seven. The number of services offered has also increased from six in FY04 to 19 in FY09.

The company plans to roll out a number of new services in the next few years. These include the tax monitoring system for the Customs Department and online application for MyKad replacement in 2009. In 2010, it plans to roll out services such as e-application of vehicle registration numbers, vehicle ownership transfer and online renewal of foreign workers' permits with immigration.

Customs tax monitoring
The customs tax monitoring service will be the most significant of the new services proposed in the near term. This involves linking up point-of-sales (POS) terminals of businesses that are subject to customs' sales and service tax (such as restaurants and entertainment outlets) to minimise under-declaration of taxes and customs administrative paper work.

The service will be undertaken via a special-purpose vehicle (SPV), in which MyEG will hold a 40% share. The SPV will undertake the program and install a software at each POS terminal for the link up — at the SPV's cost.
We understand the cost of the software is around RM1,000 per POS terminal. In return, the SPV will receive a share of the additional service and sales taxes collected, after adjusting for GDP growth.

Earnings visibility for the new service is uncertain at this juncture, as it depends on how much sales and service taxes were "under-declared" in the past, which cannot be ascertained. The revenue-sharing ratios between the government and the SPV are also not disclosed.
The potential market, nonetheless, is large. In 2008, the government collected RM3.3 billion in service tax and RM8.3 billion in sales tax. The SPV plans to start off with entertainment outlets and restaurants, which we understand accounts for about RM500 million in such taxes annually.

Equally though, the investment on the SPV's part is also very sizeable, with initial capex estimated at RM100 million. This suggests RM40 million in initial paid-up on MyEG's part, which will likely be funded from borrowings as its net cash stood at RM9.4 million in June 2009.
We are maintaining our forecasts for MyEG. The customs tax monitoring business could have a significant impact on earnings going forward but it is too preliminary to assess for now.

Nonetheless, the venture also increases its risk profile, given the large amount of capex required.
Based on our existing forecasts, we expect net profit to rise by 45% to RM24.9 million in FY10 and 28% to RM31.9 million in FY11. Price-to-earnings (P/E) valuations are inexpensive at 11 and 8.6 times for FY10-11 earnings, especially relative to its growth potential.