Introduction to VSTECS

VSTECS, a leading distributor of ICT products in Malaysia, has been at the forefront of supplying cutting-edge technology to both consumers and enterprises since its founding in 1985. The company operates through three main business segments: ICT Distribution, Enterprise Systems, and ICT Services. With a market capitalization of RM1,241 million (approximately US\$283.5 million) and a robust market presence, VSTECS is poised for significant growth in the coming years.

Investment Highlights and Recommendation

UOB Kay Hian maintains a BUY recommendation for VSTECS, with a target price of RM5.02, reflecting an impressive upside potential of 44.3% from its current share price of RM3.48. The recommendation is underpinned by the company’s strong financial performance, strategic growth initiatives, and minimal exposure to the uncertainties surrounding new AI diffusion export controls.

Financial Performance and Growth Projections

Sequentially Stronger Q4 2024

VSTECS reported a 9M24 core net profit of RM48.9 million, marking a 13% year-on-year increase. Despite this accounting for only 67% of the full-year estimate, the company is expected to deliver a robust performance in Q4 2024. Historically, Q4 has been the strongest quarter for VSTECS, contributing over 30% to annual earnings.

Revenue and Profit Growth Forecast

The company is projected to achieve a three-year revenue and core net profit compound annual growth rate (CAGR) of 12% and 20%, respectively. Key drivers include a resurgence in the PC and notebook cycle, strong adoption of Starlink technology, and booming demand for data center equipment and enterprise services in Malaysia. Notably, the ICT services segment, which commands higher margins, is expected to significantly lift overall profitability.

Impact of AI Diffusion Export Controls

The introduction of Biden’s AI diffusion export control initially caused a sector-wide derating and a 17% retracement in VSTECS’ share price. However, the impact on the company has been minimal due to its limited exposure to GPU servers, which account for less than 5% of total revenue. Management has indicated that the majority of servers sold are based on x86 architecture CPUs, catering to enterprises focused on logic-intensive tasks rather than compute-heavy applications.

Strategic Growth Drivers

VMware Distributorship Agreement

VSTECS recently secured a 100% market share for the distribution of VMware solutions in Malaysia, up from its previous 50%. This new agreement is expected to boost profitability through improved service margins and increased post-sales ICT services revenue. VMware’s dominant 80% market share in server virtualization further solidifies this growth avenue.

New Data Center Incentives

The Malaysian government’s upcoming investment incentive framework for data centers is expected to be a strategic inflection point. The initiative aims to attract high-value projects that create skilled jobs and promote local business linkages. Backed by a RM1 billion strategic fund, this framework could significantly accelerate VSTECS’ growth in the data center equipment market.

Environmental, Social, and Governance (ESG) Initiatives

Environmental Efforts

• 20% reduction in electricity withdrawal from the main grid in 2023
• 41% of total electricity consumed was sourced from solar power
• 26% reduction in paper consumption

Social Commitments

• Maintaining a 50% male-female employee composition
• Zero work fatalities over the past nine years
• 100% local workforce

Governance Standards

• Zero confirmed cases of corruption or harassment
• No fines or penalties from regulatory authorities
• 57% of directors are independent

Valuation and Final Recommendation

VSTECS is valued at a target price of RM5.02, based on a 20.0x 2025F PE and a 1.0x PEG ratio. This valuation reflects the company’s three-year net profit CAGR of 20%. The analysts at UOB Kay Hian remain optimistic about VSTECS’ growth trajectory, supported by its strong fundamentals and strategic initiatives.

Key Financial Metrics