Investment Highlights

• Stock Idea. VSTECS is the largest distributor for ICT products and enterprise systems in Malaysia. Based in Petaling Jaya, the company was listed on the Main Market of Bursa Malaysia in April 2010.

• The group’s 3 business segments are ICT Distribution, Enterprise Systems, and ICT Services. Under ICT Distribution, VSTECS distributes ICT products primarily through retailers while Enterprise Systems distribute commercial and enterprise ICT products to system integrators and corporate dealers. Complementing these 2 segments is ICT Services, which the group add value by providing enterprise solution by setting up infrastructure for clients’ servers, network and cybersecurity.

• In 9MFY21, VSTECS’ revenue rose by a stellar 37% YoY while EBIT accelerated even faster by 55% YoY. This is largely contributed by strong demand from ICT products such as PC notebooks and tablets with the persistence of work/study from home trends. As at end-3QFY21, the backlog for the shipment of PC notebooks and tablets stood at 15 weeks, much longer than pre-pandemic era of 4 weeks.

• In terms of supply chain disruptions, recent conversation with the management indicated that VSTECS has not been spared from the high shipping and logistics cost to import PC notebooks and tablets. However, the impact is substantively mitigated by higher quantity in shipments, resulting in lower average cost per unit.

• Based on the Department of Statistics, percentage of households with computer access in Malaysia stood at 77.6% in 2020. With the trend moving towards multiple PCs per households given the need to work/study from home coupled with government’s extension of special tax relief of RM2,500 for the purchase of handphones, computers and tablets (which was announced in Budget 2022), a higher penetration of IT access in households will further drive VSTECS growth momentum.

• Key risks to the group stem from worsening supply chain disruptions, which continue to affect ICT product shipment. In addition, any lockdown or movement restrictions will impede project implementation and strain the group’s working capital.

• VSTECS is currently trading at an undemanding trailing PE of 8x with 9MFY21 earnings surging by 47% YoY. Pending 4QFY21 results next month, we expect the growth trajectory to continue, supported by pent-up consumer demand and year-end holiday season sales.

Source: AmInvest Research - 4 Feb 2022