MYEG ... Mar10

S & P Results Review & Earnings Outlook

 2QFY10 (Jun) net profit of MYR4.7 mln (+6.0% QoQ, +1.0% YoY) missed our expectation mainly due to higher advertising expenses.

 Advertising expenses grew 117% QoQ to MYR1.3 mln in 2QFY10 as a of result of its brand awareness campaign. This, coupled with higher staff cost partly offset stronger QoQ revenue contributions (16% of sales vs. 15% in the previous quarter) from its online road tax renewal and insurance services. EBITDA margins slipped to 41.7%, from 42.7% in 1QFY10. On cumulative basis, 1HFY10 net profit stood at MYR9.2 mln (+4.1%YoY), accounting for 47.1% of our FY10 forecast.

 Meanwhile, its new online custom tax monitoring system is well underway for a pilot launch in April 2010. Management expects to start deploying hardware estimated to cost approximately MYR40 mln, targeting entertainment outlets in the Klang Valley. While this could potentially offer MYEG earnings upside in the long term, earnings visibility for the new service is limited at this juncture.

 In anticipation of a stronger 2HFY10 amid greater uptake of JPJrelated services during the school holidays and higher adoption of the online road tax renewal service, we are maintaining our earnings projections for FY10. Our projections for FY11 remained unchanged. We exclude potential revenue from the new online custom tax
monitoring service in our forecast, given the lack of track record and execution risks (and significant upfront investment).

Recommendation & Investment Risks

 We maintain our Buy recommendation on MYEG and our 12-month target price at MYR0.55.

 MYEG continues to draw strength from the government concession stable income base, while upside potential to its earnings growth can come from new e-service applications. In a bid to cement its stronghold of e-government services, it plans to establish linkages with as many government agencies as possible to increase product stickiness and enhance its advantage over potential competitors.

 Our 12-month target price of MYR0.55 is based on DCF valuation, given its relatively stable income stream. Key assumptions include 9.5%-10.3% WACC and 1% terminal growth rate (both unchanged). Additionally, our target price also includes a projected net dividend of 1.4 sen (unchanged).

 Risks to our recommendation and target price include: (i) the revocation of the government concession, (ii) significant delay in project approvals, (iii) the entry of new competing concessionaires, which will significantly affect the company’s recurring income, as well as (iv) excessive investment and execution risk for the new online custom tax monitoring service.