Regional Morning Notes
Thursday, 14 November 2024
Broker: UOB Kay Hian
VSTECS Berhad: Unveiling Strong Performance and Promising Future
Recommendation: BUY (Maintained)
Share Price: RM3.20
Target Price: RM5.02
Upside: +56.9%
Company Overview
VSTECS Berhad, founded in 1985, stands as the leading distributor of Information and Communications Technology (ICT) products in Malaysia. The company serves both consumers and enterprises, providing a broad range of ICT products and IT services, including pre-sales, integration, and post-sales support.
Stock Data
- GICS sector: ICT Distributor
- Bloomberg ticker: VSTECS MK
- Shares issued: 356.6 million
- Market cap: RM1,141.0 million (US\$256.6 million)
- 3-month average daily turnover: US\$0.3 million
- 52-week high/low: RM4.52/RM1.26
Major Shareholders
- VSTECS Holding Ltd: 45.6%
- Sengin Sdn Bhd: 12.2%
- Dasar Technologies Sdn Bhd: 8.6%
Recent Performance
VSTECS’s 3Q24 earnings soared to RM19.5 million, marking a remarkable 55% year-on-year (yoy) increase and a 28% quarter-on-quarter (qoq) rise. The record quarterly revenue was fueled by a rebound in consumer and enterprise spending. Despite the 9M24 results accounting for only 67% of the full-year estimate, a stronger 4Q24 is anticipated.
3Q24 Results
| Year to 31 Dec | 3Q24 | qoq % chg | yoy % chg | 9M24 | yoy % chg |
|---|---|---|---|---|---|
| Revenue | 841.76 | 34.81 | 30.22 | 2,082.52 | 8.47 |
| Gross Profit | 48.92 | 30.45 | 28.56 | 124.43 | 11.44 |
| EBITDA | 24.17 | 28.43 | 46.43 | 60.82 | 8.84 |
| EBIT | 23.31 | 29.63 | 48.46 | 58.29 | 8.83 |
| PBT | 26.48 | 31.25 | 53.45 | 65.53 | 13.22 |
| Tax expense | (6.92) | 40.22 | 52.69 | (16.40) | 11.91 |
| PATAMI | 19.57 | 28.34 | 53.72 | 49.13 | 13.67 |
| Core PATAMI | 19.53 | 28.31 | 55.26 | 48.91 | 13.41 |
Strong Outlook for 4Q24
The company anticipates a stronger 4Q24, supported by several factors:
- Increased momentum from the ICT distribution segment, driven by seasonal consumer spending and new product launches such as Google Pixel and iPhone16.
- Enhanced cloud service offerings.
- Increased contribution from VMWARE under a new exclusive arrangement.
- More shipments of AI-related data center (DC) equipment.
- Steady adoption of Starlink and the potential rollout of Starlink Mini.
- Seasonally stronger consumer and enterprise spending in 4Q24.
Key Financials
| Year to 31 Dec (RMm) | 2022 | 2023 | 2024F | 2025F | 2026F |
|---|---|---|---|---|---|
| Net turnover | 2,770.6 | 2,727.2 | 3,035.6 | 3,413.8 | 3,868.3 |
| EBITDA | 79.5 | 82.7 | 89.0 | 111.8 | 135.9 |
| Operating profit | 76.6 | 79.6 | 92.2 | 113.4 | 136.9 |
| Net profit (rep./act.) | 59.7 | 67.4 | 72.9 | 89.5 | 107.9 |
| Net profit (adj.) | 59.4 | 62.0 | 72.9 | 89.5 | 107.9 |
| EPS (sen) | 16.7 | 17.4 | 20.4 | 25.1 | 30.3 |
| PE (x) | 19.3 | 18.5 | 15.8 | 12.8 | 10.6 |
| P/B (x) | 2.8 | 2.5 | 2.3 | 2.1 | 1.9 |
| EV/EBITDA (x) | 14.0 | 12.5 | 11.6 | 9.0 | 7.3 |
| Dividend yield (%) | 1.9 | 2.0 | 2.2 | 3.9 | 3.3 |
| Net margin (%) | 2.1 | 2.3 | 2.4 | 2.6 | 2.8 |
| Net debt/(cash) to equity (%) | (8.1) | (25.7) | (23.1) | (25.2) | (25.4) |
| Interest cover (x) | 151.4 | 62.7 | 72.6 | 89.4 | 107.8 |
| ROE (%) | 14.5 | 14.8 | 14.5 | 16.3 | 17.4 |
9M24 Performance Highlights
The first nine months of 2024 saw a 9% yoy increase in sales, driven by a strong rebound in both consumer and enterprise systems in 3Q24. This growth effectively offset the sluggish market conditions experienced in the first half of the year. Core net profit surged by 13% yoy, supported by higher sales, increased net finance income, and greater profit contributions from its associate, Isatec.
Strategic Partnerships
In 2024, VSTECS secured several key distributorships, including partnerships with Starlink, AWS, Google Gemini, and more. These collaborations are set to accelerate Malaysia’s digitalisation efforts, bringing advanced technology and cloud solutions to businesses and consumers nationwide. With these strategic alliances, VSTECS is well-positioned for prolonged multi-year growth in the digital economy.
Stock Impact
The Malaysian government is restructuring its incentive packages for data center (DC) investments to prioritize high-value activities that offer broader economic benefits. Treasury Secretary General Datuk Johan Mahmood Merican highlighted that while DCs involve significant capital expenditure, they often do not create enough high-skilled jobs and can strain resources. To address this, the government will introduce a new investment incentive framework by mid-2025, using a “scorecard” approach to assess projects based on job creation, local business linkages, sustainability, and alignment with strategic economic sectors. These incentives will be backed by a RM1 billion strategic fund designed to cultivate local talent and promote high-value activities in the E&E and AI sectors, ensuring long-term economic benefits.
This could be a strategic inflection point for VSTECS, accelerating its DC equipment and GPU server deals by multiple folds, growing from the current tens of millions of ringgit. Additionally, the potential order from colocation DCs for IT equipment presents a significant opportunity. VSTECS targets the colocation DC market, which typically secures IT equipment from distributors like VSTECS. With 200MW of colocation DCs under construction, this represents a total addressable market of around RM10 billion. VSTECS holds a 50% market share in the enterprise systems distribution in Malaysia, indicating substantial growth potential.
Valuation and Recommendation
VSTECS is recommended as a BUY with an unchanged target price of RM5.02, based on a 20.0x 2025F PE. Given the lack of local listed peers for valuation benchmarking, a 1.0x PEG ratio is used, reflecting a three-year net profit CAGR of 20% from 2023. The booming DC industry in Malaysia supports this valuation, reminiscent of the tech bull cycle in 2021.
Environmental, Social, Governance (ESG) Updates
Environmental
- Electricity withdrawal from the main grid reduced by 20% yoy in 2023.
- Solar power constituted 41% of total electricity consumed in 2023.
- 26% reduction in paper consumption.
Social
- Maintaining a 50% male-female composition among total employees.
- Zero work fatalities recorded over the past nine years.
- 100% local employees.
Governance
- Zero confirmed corruption or harassment cases reported.
- Zero fines or penalties from regulatory authorities.
Key Principal Relationships
Industries Served and Job Scope
DC Products and Solutions
Profit & Loss and Balance Sheet
| Year to 31 Dec (RMm) | 2023 | 2024F | 2025F | 2026F |
|---|---|---|---|---|
| Net Turnover | 2,727.2 | 3,035.6 | 3,413.8 | 3,868.3 |
| EBITDA | 82.7 | 89.0 | 111.8 | 135.9 |
| Depreciation & Amortisation | (3.1) | (3.1) | (1.6) | (1.0) |
| EBIT | 79.6 | 92.2 | 113.4 | 136.9 |
| Net Interest Income/(Expense) | (1.3) | (1.3) | (1.3) | (1.3) |
| Pre-tax Profit | 82.8 | 95.9 | 117.8 | 142.0 |
| Tax | (15.4) | (23.0) | (28.3) | (34.1) |
| Net Profit | 67.4 | 72.9 | 89.5 | 107.9 |
| Net Profit (Adjusted) | 62.0 | 72.9 | 89.5 | 107.9 |
Cash Flow
Related Posts
| Year to 31 Dec (RMm) | 2023 | 2024F | 2025F | 2026F |
|---|---|---|---|---|
| Operating | 107.6 | 25.6 | 67.4 | 58.1 |
| Pre-tax Profit |