Investing in the stock market can offer the potential for significant returns, but it also involves inherent risks that must be carefully considered. As a result, investors must conduct thorough due diligence on any company they are considering investing in, including analysing the business risks associated with the company’s operations.
In this article, we will use MYEG Services Berhad, a leading provider of e-government services in Malaysia, as a case study to explore how investors can analyse and evaluate the potential business risks associated with a stock investment. Through this case study, investors can better understand how to assess business risks when making investment decisions.
Background
MYEG is a leading technology company in Malaysia that provides innovative solutions for government-related services. The company was founded in 1999. The company initially focused on creating solutions to digitize and automate government services and has since become a significant player in the e-Government services industry in Malaysia. Today, MYEG is publicly listed on the Main Market of Bursa Malaysia Securities Berhad, with a market capitalization exceeding RM5 billion.
MYEG provides extensive digital solutions designed to simplify and streamline government processes for citizens and businesses. Among its core services are online renewals for road tax, vehicle registration, driver’s licenses, and immigration-related services such as passport renewals and foreign worker permit applications. MYEG also offers online payment solutions for various government services, providing secure and convenient payment options for its customers.
According to MYEG’s financial reports, the company has achieved impressive growth figures, with a compound annual growth rate (CAGR) of 25.6% in revenue and 30.75% in net income from 2012 to 2022. These figures demonstrate the company’s ability to adapt to changing market conditions, and customer needs while maintaining steady growth and profitability.
However, the recent news that all immigration services in Malaysia will revert to the government by 2025 has raised concerns among investors, as MYEG’s revenue heavily depends on providing digital solutions for government-related services. In this section, we will identify the business risks facing MYEG and their potential impact on the company’s financial performance and growth prospects.
Concentration risk
MYEG’s reliance on a single customer for a significant portion of its revenue presents a significant concentration risk for the company. MYEG derives a substantial portion of its revenue from concession services for government-related services, with immigration services being a significant contributor.
In the 2021 fiscal year, government-related concession services contributed over 25% of MYEG’s revenue. This revenue concentration from a single customer leaves the company vulnerable to changes in demand and regulations from the government. A decline in revenue from this service or the loss of this service entirely would significantly impact the company s financial performance. With the possible reversion of immigration services to the government, MYEG would no longer be able to offer these services, leading to a substantial loss of revenue for the company. As a result, the company’s financial performance and growth prospects could be significantly affected.
Lack of bargaining power
Another significant business risk facing MYEG is its lack of bargaining power against its customers. This risk is evident in the company’s declining margins over the years. MYEG’s suppliers and customers could dictate the terms of the company’s contracts, leading to lower profitability. In addition, the intense competition in the e-Government services industry could limit MYEG’s ability to set competitive prices, further reducing the company’s bargaining power. If MYEG cannot negotiate favourable terms with its customers, it may increase costs, impacting its profitability. Moreover, if MYEG cannot remain competitive in pricing, it may lose market share to its competitors, impacting the company’s revenue growth and financial performance. As a result, MYEG’s lack of bargaining power is a critical business risk that investors should consider before investing in the company.
Political risk
Malaysia’s political landscape is characterized by high volatility, with the federal government changing four times in the last six years alone. MYEG, which relies heavily on government-related services as a primary source of revenue, is particularly vulnerable to changes in the political landscape in Malaysia. Any changes in government policies and regulations could affect the demand for MYEG’s services, impacting the company’s financial performance and growth prospects.
Furthermore, government contracts account for a significant portion of MYEG’s revenue, making it even more susceptible to political changes. A shift in priorities or changes in procurement policies following a change in government could affect MYEG’s ability to secure or renew new contracts. The recent news regarding Malaysia’s decision to insource immigration services by 2025 is a clear example of how government policy changes can significantly impact MYEG’s business.
Moreover, political instability can also impact investor confidence, leading to a lack of demand for MYEG’s stock. As a result, investors must consider Malaysia’s political landscape when evaluating the business risks of investing in MYEG.
The fifth perspective
When investing in stocks, investors must analyse the business risks associated with a company. A few key risks to look out for include a concentrated customer or supplier base, lack of bargaining power over suppliers or customers, and susceptibility to changes in government policies or regulations. Investing in companies exhibiting these risks can be risky, and investors need to approach such investments cautiously.
Another real-life example of a company that faces a business risk due to its customer base is Palantir, a data analytics company that provides software solutions to U.S. government agencies and other organizations that rely heavily on government contracts for revenue. Any government policy or regulation changes could impact its business and financial performance.
Another example is Lockheed Martin, a leading aerospace and defence company. The company’s revenue also heavily relies on U.S. government contracts, which account for most of its revenue. Lockheed Martin’s bargaining power over its suppliers is limited, as the company relies on a few key suppliers for critical components. Any disruptions in the supply chain could impact the company’s ability to fulfil contracts and negatively impact its financial performance.
Therefore, investors must understand that business risks are inherent to any company and cannot be eliminated. However, by identifying and analysing these risks, investors can make informed decisions when investing in the stock market. Investors can consider diversifying their portfolio to include companies with a wide customer and supplier base or companies with strong bargaining power. Ultimately, investors can make better investment decisions and mitigate potential losses by being aware of the potential risks associated with a company.
