The Malaysian government has recently decided to lift the freeze on hiring foreign workers for four sectors, according to Transport Minister, Datuk Seri Liow Tiong Lai. The four sectors include manufacturing, construction, plantation and furniture-making industries. The decision was made due to the shortage of workers, allowing these sectors to bring in foreign workers.
 
Following this, Macquarie Equities Research (MQ Research) published a report, expressing its positive view on the government’s decision due to its benefit towards My E.G.’s foreign worker permit renewal. MQ Research also maintained My E.G.’s Outperform rating with a target price (TP) of RM2.60.
 
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Event

• MQ Research maintains an Outperform recommendation on My E.G. with a discounted cash flow (DCF) derived TP of RM2.60. The Cabinet decision to lift the foreign workers hiring freeze will increase the numbers of legal foreign workers and help to mitigate any shortfall in registrations under the Illegal Foreign Workers’ Rehiring Program. The pick-up in registrations and strong quarterly results should support a rerating of My E.G.’s share prices, which trade at an undemanding 18x CY17E price earnings.

 
Impact

• Cabinet lifts the freeze on hiring foreign workers to assist the manufacturing, construction, plantation and furniture-making industries that are facing a major labor shortage. MQ Research expects the government to gradually lift the hiring freeze for other sectors once they improve the hiring system.

• MQ Research is positive on the lifting of the hiring freeze – It should lead to an increase in numbers of legal foreign workers and lift transaction volumes for My E.G.’s foreign workers permit renewal, worker insurance and SIM card distribution businesses. That said, the lifting has limited upfront benefits to My E.G., as the company is not involved in hiring of new foreign workers.

• Rising risk on expectations of 1m registrations under the Rehiring Program. While MQ Research expects a pick-up in registrations in coming months on improvement in information and process flow, as well as possible relaxation of rehiring requirements, there is increased risk on both MQ Research and the street’s expectations of 1m registrants under this program. Thus far only 55,000 illegals have been rehired, according to a news report in The Star. The timely lifting of the hiring freeze should help to mitigate any shortfall in the rehiring registrations. Overall, MQ Research estimates every 200,000 shortfall in the net addition of foreign workers to decrease FY16-17E EPS by 3%-4% and target price by 5sen to 6sen.

 
Earnings and target price revision

• No change.

 
Price catalyst

• 12-month price target: RM2.60 based on a DCF methodology.

• Catalyst: Pick-up in registrations under the Rehiring Program, strong quarterly results, possible announcement of GST Electronic Monitoring System program by end-2016

 
Action and recommendation

• Maintain Outperform.

Source: Macquarie Research - 19 May 2016