MY E.G. Services- 9M09 net profit lower than expectations

Price: RM0.425
Target Price: RM0.55
Recommendation: BUY

· 9M09 net profit of RM13.0m was below our expectations but within consensus being only 62%% and 73% of our full year forecast of RM21.2m and consensus of RM17.7m. Historically, 2H (January-June) makes up 60% of the full year profits as learner’s driver license application is at its highest. But this year, the response was lower by about 20% leading to flat quarterly revenue which was bolstered by higher acceptance of road tax and driver’s license renewal which is increasing in popularity

· YoY, 9M09 net profit was 22.2% higher with strong EBITDA margin of 42% compared to 39.2% in 9M08. This is attributable to the road tax renewal service gaining market acceptance in light of the increase marketing efforts to raise its market presence resulting in 18% market share.

· QoQ, 3Q09 net profit was 10.6% lower as MYEG increased its marketing and advertising campaign to TV ads sponsoring the EPL.

· YoY, 3Q09 net profit was only 1% higher despite stronger EBITDA margin of 40.6% compared to 34.9% as turnover fell 3.7% on lower learner’s driver license application. In addition depreciation was higher on the back of deployment of more kiosks.

· Lowering FY09E and FY10E net profit forecast by 11.3% and 9.2% to RM18.8m and RM23.6m. We are imputing slowdown in theory test examination and learner driver’s license application.

· Implementation of other JPJ services on track. MYEG is currently implementing for JPJ the electronic application of vehicle registration numbers and transferring of motor vehicle ownership in 2H09. The company is continuing to expand its reach in motor insurance and establishing more kiosks at the Hire Purchase centers of their banking partners.

· Maintain BUY and target price of 55 sen using FY10E PER of 14x and EPS of 3.9sen. The stock is trading at attractive FY10E and FY11E PER of 11x and 9x respectively.