THE three-month long global equities rally has started to stall as investors turn more cautious. In this environment, defensive stocks — largely ignored in the rally — are likely to regain some investor attention, as the market reassesses valuations versus expectations of the recovery ahead.

MyEG Services (42 sen) offers the best of both worlds. It offers strong growth and yet defensive earnings, with a cash-rich balance sheet and high returns on equity and profit margins. The company is Malaysia's dominant e-services provider, providing a wide range of government-to-citizen (G2C) services with a number of government departments.

Its main earnings driver is services related to the Road Transport Department (JPJ), such as the road tax renewal services and driving licence tests. The underlying market for these services — such as the number of vehicles and drivers and insurance premiums needed — is large, resilient and many are recurrent.

Demand is also being supported by the growing popularity of online services and transactions for convenience and cost reasons. MyEG's services are offered through its website (www.myeg.com.my) and its network of 62 services branches and 207 e-service kiosks.

MyEG's earnings are poised to grow strongly in the next few years, largely driven by growing acceptance of the road tax renewal service and ancillary insurance premiums, as well as a pipeline of new services to be rolled out.  

We expect net profit to rise by 24% to RM18.3 million in financial year (FY) June 2009 and 47% to RM26.9 million in FY10, with earnings per share (EPS) of three sen and 4.5 sen, respectively. At 42.5 sen, the stock is trading on price-to-earnings (P/Es) of 13.9 and 9.5 times FY09-10, which are reasonable relative to its strong double-digit growth, and high return on earnings (ROE) and net margins of 30% in FY08

Recent third-quarter results
MyEG's recently released results for the first three quarters of FY June 2009 were broadly within our expectations, although earnings for third quarter (3QFY09) (January-March 2009) came in relatively flat.

For the first nine months of FY09, MyEG's revenue rose 22% year-on-year (y-o-y) to RM38.7 million. Net profit increased 22.6% to RM13.1 million. The company enjoys income tax exemption.

The company's earnings are seasonal with the first half (1H) (July-December) being seasonally slower than the second half (January-June). This is due to the fact most young adults sit for their JPJ driving tests from December until the first few months of the year, after completing their end-of-year exams.

For the latest quarter though (3QFY09), MyEG's net profit stayed rather flat at RM4.2 million, compared with previous double-digit growth norms, although turnover rose 9.2% y-o-y to RM13.2 million. The increase in business from the road tax renewal service was offset by lower JPJ driving tests as some students deferred getting their driving licences due to the weak economy.

But with the worst for the economy over and the poor state of public transportation, we believe this is only temporary.  In addition, the company also incurred higher marketing and advertising expenditure, mainly for the road tax renewal services.  

Balance sheet remains in very good shape despite heavy capital expenditure into new kiosks and branches. Net cash stood at RM12.8 million in March 2009.

Concerns over new competition, which surfaced in November 2008, have yet to materialise and they appear less likely now given MyEG's delivery success so far. Government agencies are also granting the company an even wider range of new services, further cementing its dominance.

Strong demand for road tax services
The road tax renewal service is the key to MyEG's growth. The company has two main business models for the service — an online and a kiosk-based one.

We understand the online service currently attracts over 2,000 transactions per day, up from 1,800 transactions per day in 2QFY09 and 1,000 per day in 1QFY09. The number of ancillary motor insurance premiums sold daily has also increased to 80 in the latest quarter, compared with 60 in 2QFY09 and 40 in 1QFY09.

Meanwhile, the kiosk-based service will serve financial institutions and their clients. MyEG has signed up a number of financial institutions and placed a kiosk in selected branches of the financial institutions. The kiosks cost about RM80,000 each and are borne by MyEG.

These kiosks will provide MyEG with an additional physical network and customer base — via banks and insurance companies, and enable the financial institutions to also offer a value-added service to their customers.

As we had expected, MyEG's road tax renewal services have also seen a jump in demand from April 2009 onwards, after the end of the government's fuel rebate plan implemented mid last year. As most people claimed the one-time RM625 per vehicle cash rebate in person at post offices upon renewal of their road tax, the expiry of this programme will divert more users online.

Expanding market presence
MyEG's physical network — comprising e-service centres and e-service kiosks — has grown very rapidly, both from expansion as well as the acquisition of MySpeed in 2007. The company plans to increase 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 in FY05, 27 in FY06-07, 54 in FY08 (after including MySpeed) and 62 in 1HFY09. Another 38 centres are in the process of being set up, mainly in Sabah and Sarawak.  The number of e-service kiosks has also risen exponentially — from 13 in FY04-05 to 14 in FY06, 65 in FY07, 140 in FY08 and 207 in 1HFY09.

New pipeline of services  
MyEG has been increasing 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 at present. The company will roll out a number of new services in the next few years.

In 2009, the company plans to roll out the online transfer of motor vehicle ownership, plus a number of services from the Police (Polis DiRaja Malaysia, PDRM). These include online police reports and email notification of police summonses.

For 2010, MyEG plans to roll out more JPJ-related services such as e-application of vehicle registration numbers and e-application of new motor vehicle registrations, and other government services such as e-courts and online renewal of maids' permits. Further out in 2011, it plans to introduce online services for the Department of Statistics and Ministry of International Trade and Industry (MITI), among others.  

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.