Tuesday, Oct 18, 2022
MARC Ratings has assigned a preliminary rating of AA-IS to MY E.G. Services Berhad’s (MYEG) proposed Islamic Medium-Term Notes (IMTN) programme of up to RM1.0 billion in nominal value. The rating outlook is stable.
The assigned rating reflects MYEG’s established position as a longstanding concessionaire for e-government services, underpinned by its strong IT infrastructure. The rating also considers the steady growth of its non-concession-related businesses (commercial businesses), its high operating margin and healthy cash flow generation. Moderating the rating are market and operational risks associated with its two new key businesses, namely its blockchain platform and foreign worker accommodation projects.
MYEG has been primarily a concessionaire to build, own and operate an electronic platform to provide government-to-citizens (G2C) services for the Malaysian government since February 2000. In providing its services, MYEG has over 900 kiosks and 100 e-Service Centres nationwide in addition to its online platforms, supported by robust digital infrastructure. As a concessionaire, MYEG is exposed to renewal and termination risks upon expiry of its three-year concession agreements, although we view these risks as substantially mitigated by the group’s longstanding operating track record of over 20 years. MYEG’s dominant position in the industry and significant IT expertise that have created a high barrier to entry further support our view.
Its concession services are largely related to the operations of two key government agencies: Jabatan Pengangkutan Jalan (renewal of driver’s license, etc) and Jabatan Imigresen Malaysia (renewal of foreign worker permits, etc), accounting for about 98.8% of concession revenue of RM60.4 million in 2021. We note that while concession revenue has been fairly steady, its contribution to consolidated revenue has declined to about 8% in 2021 (2017: 21%) as revenue from its commercial businesses has grown sharply to RM661.4 million (2017: RM294.8 million).
MARC Ratings views the ability of MYEG to leverage on its concession business for the growth of its commercial segment through cross-selling of products and services as positive. The employment of its well-established IT infrastructure to expand into new businesses within a short turnaround time in response to government policies has aided the growth of the group. The swift implementation of health-related services for the Ministry of Health during the COVID-19 pandemic in 2020, which boosted its earnings in 2021, attests to MYEG’s adaptability.
Going forward, however, MYEG’s new venture, the Zetrix blockchain platform, has been forecast to be its key earnings driver. The platform, aimed at facilitating transparency and increasing delivery efficiency for supply chain management, among other uses, will also be integral to the Malaysia Blockchain Infrastructure, a government-initiated project to expedite further digitalisation. Notwithstanding the advantages inherent in the blockchain technology, there are concerns on the nascent technology in regard to its efficacy and widespread adaptability. MYEG will expand the platform’s reach in the region through the development of nodes and supernodes, for which it has earmarked a substantial capex requirement of up to RM200 million over the next two years.
MYEG’s additional capex requirement of up to RM300 million for its near-term projects will include construction of hostels for foreign workers across several states in the country. It will build, own and operate the government-certified hostels. Currently MYEG has projects ongoing in Selangor and Johor which will have a capacity of up to 7,000 persons per location. Significantly larger than the two hostels it currently operates, one in Selangor and another in Melaka with 400-person capacity each, the expansion into foreign worker accommodation could pose operational and market risks. The initial drawdown of up to RM500 million under the IMTN programme is projected to be utilised for the blockchain and foreign worker accommodation projects.
Total borrowings of about RM241.1 million as at end-1H2022 will increase to about RM740 million as a result of the initial drawdown, translating to an increase in gross debt-to-equity (DE) ratio from 0.14x to 0.43x. Assuming full drawdown of RM1.0 billion, gross DE ratio would increase to about 0.73x. The group has maintained a healthy liquidity position, with cash balances of about RM223.3 million as at end-1H2022, that would moderate the increase in its leverage position. The rating agency also draws comfort from the demonstrated shareholder support through equity private placements, which raised RM211.5 million in 2020 and RM208.5 million in 2021, that has bolstered the group’s liquidity position.
For 1H2022, MYEG recorded revenue and pre-tax profit of RM323.6 million and RM174.7 million. Operating profit margin remained strong at 55.1% while cash flow from operations (CFO) amounted to RM159.6 million. CFO from existing businesses would remain supportive of CFO debt and interest coverages to be well within the rating band.
Contacts:
The assigned rating reflects MYEG’s established position as a longstanding concessionaire for e-government services, underpinned by its strong IT infrastructure. The rating also considers the steady growth of its non-concession-related businesses (commercial businesses), its high operating margin and healthy cash flow generation. Moderating the rating are market and operational risks associated with its two new key businesses, namely its blockchain platform and foreign worker accommodation projects.
MYEG has been primarily a concessionaire to build, own and operate an electronic platform to provide government-to-citizens (G2C) services for the Malaysian government since February 2000. In providing its services, MYEG has over 900 kiosks and 100 e-Service Centres nationwide in addition to its online platforms, supported by robust digital infrastructure. As a concessionaire, MYEG is exposed to renewal and termination risks upon expiry of its three-year concession agreements, although we view these risks as substantially mitigated by the group’s longstanding operating track record of over 20 years. MYEG’s dominant position in the industry and significant IT expertise that have created a high barrier to entry further support our view.
Its concession services are largely related to the operations of two key government agencies: Jabatan Pengangkutan Jalan (renewal of driver’s license, etc) and Jabatan Imigresen Malaysia (renewal of foreign worker permits, etc), accounting for about 98.8% of concession revenue of RM60.4 million in 2021. We note that while concession revenue has been fairly steady, its contribution to consolidated revenue has declined to about 8% in 2021 (2017: 21%) as revenue from its commercial businesses has grown sharply to RM661.4 million (2017: RM294.8 million).
MARC Ratings views the ability of MYEG to leverage on its concession business for the growth of its commercial segment through cross-selling of products and services as positive. The employment of its well-established IT infrastructure to expand into new businesses within a short turnaround time in response to government policies has aided the growth of the group. The swift implementation of health-related services for the Ministry of Health during the COVID-19 pandemic in 2020, which boosted its earnings in 2021, attests to MYEG’s adaptability.
Going forward, however, MYEG’s new venture, the Zetrix blockchain platform, has been forecast to be its key earnings driver. The platform, aimed at facilitating transparency and increasing delivery efficiency for supply chain management, among other uses, will also be integral to the Malaysia Blockchain Infrastructure, a government-initiated project to expedite further digitalisation. Notwithstanding the advantages inherent in the blockchain technology, there are concerns on the nascent technology in regard to its efficacy and widespread adaptability. MYEG will expand the platform’s reach in the region through the development of nodes and supernodes, for which it has earmarked a substantial capex requirement of up to RM200 million over the next two years.
MYEG’s additional capex requirement of up to RM300 million for its near-term projects will include construction of hostels for foreign workers across several states in the country. It will build, own and operate the government-certified hostels. Currently MYEG has projects ongoing in Selangor and Johor which will have a capacity of up to 7,000 persons per location. Significantly larger than the two hostels it currently operates, one in Selangor and another in Melaka with 400-person capacity each, the expansion into foreign worker accommodation could pose operational and market risks. The initial drawdown of up to RM500 million under the IMTN programme is projected to be utilised for the blockchain and foreign worker accommodation projects.
Total borrowings of about RM241.1 million as at end-1H2022 will increase to about RM740 million as a result of the initial drawdown, translating to an increase in gross debt-to-equity (DE) ratio from 0.14x to 0.43x. Assuming full drawdown of RM1.0 billion, gross DE ratio would increase to about 0.73x. The group has maintained a healthy liquidity position, with cash balances of about RM223.3 million as at end-1H2022, that would moderate the increase in its leverage position. The rating agency also draws comfort from the demonstrated shareholder support through equity private placements, which raised RM211.5 million in 2020 and RM208.5 million in 2021, that has bolstered the group’s liquidity position.
For 1H2022, MYEG recorded revenue and pre-tax profit of RM323.6 million and RM174.7 million. Operating profit margin remained strong at 55.1% while cash flow from operations (CFO) amounted to RM159.6 million. CFO from existing businesses would remain supportive of CFO debt and interest coverages to be well within the rating band.
Contacts:
Yazmin Abdul Aziz, +603-2717 2948/ yazmin@marc.com.my
Farhan Darham, +603-2717 2945/ farhan@marc.com.my
Rajan Paramesran, +603-2717 2933/ rajan@marc.com.my