• Through its wholly owned subsidiaries, VTC primarily involved in enterprise IT solutions, including the provision of implementation services, maintenance, support and professional services as well as resale of hardware and software.

• We project the revenue to grow at 8.5-30.0% to RM25.1m-RM39.2m for FY24-26f, while the core net profit is expected to increase by 7.3-20.3% to RM7.0m-RM9.6m, supported by the management’s aim to take on more complex jobs, higher margins and continued demand in the telecommunication and banking sectors

• We derive a fair value of RM0.51 (an upside of 104% against the IPO price of RM0.25) for VTC. This fair value is derived by pegging a P/E ratio of 24.0x to the FY25f EPS of 2.14 sen. Although the peer average forward P/E stood at 16.2x, we believe VTC may pegged to higher P/E of 24.0x given its strong PAT margin of more than 28% in FY23 (as compared to average peer margin of 8.8%), coupled with the AI-theme upcycle environment.

Investment Highlights

Tapping into growth industries and AI-driven segments… As of the latest practicable date (LPD), Vetece Holdings Bhd (VTC) has 80 IT solutions personnel. The group plans to use its IPO proceeds to hire an additional 4 IT professionals and 2 sales and marketing personnel. This initiative is aimed at enhancing VTC's ability to tap into AIdriven data handling and analytics solutions.

…collaboration with new technology partners. VTC has partnered with 7 technology vendors, including Oracle, WSO2, and Salesforce. This collaboration allows VTC to deliver customized solutions tailored to clients' business models, enhancing efficiency. With a strong track record with major clients like Telekom Malaysia, Telstra, and China Construction Bank, VTC is poised to strengthen its Singapore operations, partner with more vendors, and offer improved services to prospective clients. Also, VTC could potentially partners with 2 new or existing technology partners, and RM2.19m is earmarked for this expansions.

Singapore, a prime location for IT solutions. Singapore stands out as a preferred destination for IT firms to engage in technology development among SEA countries mainly driven by (i) favourable government support, (ii) robust tech ecosystem, and (iii) strong banking sector. VTC plans to use RM3.29m of its proceeds to strengthen the Singapore operations by establishing a local office and acquiring talent, enhancing marketing and client relations.

Stable and strong margins. The group has consistently improved its PAT margins, increasing from 15.66% in FY21 to 28.38% in FY23, and currently standing at 26.49% as of FPE24. Looking ahead, we expect VTC’s margins to remain relatively stable, in line with the group’s positive outlook.

Adapting to rapid changes in telecommunications technology. The future of network choices for telcos and their customers is becoming increasingly diverse due to rapid technological advancements. According to PwC's Global Telecom Outlook 2023-2027, they anticipate that the (i) 5G will become the leading smartphone connection by 2025, (ii) fibre deployment will gain momentum; and (iii) Open Radio Access Networks (Open RAN), which focus on boosting interoperability among devices and providers, will remain a niche technology.

Continued demand from telecommunications operators. As of FY23, the Telecommunications segment accounts for 46.92% of the group’s revenue. Given the rapid advancements in telecommunications technology, these developments are expected to positively impact the demand for IT services, positioning VTC well for future growth.

Establishment of a Centre of Excellence (COE) for productivity and cost-efficiency. The group plans to establish a Center of Excellence (COE) for software solutions, enabling them to undertake projects for overseas clients remotely from Malaysia. The COE, designed to meet IT security standards, will appeal to overseas clients seeking cost-effective IT solutions without compromising data security. We believe that this will allow the group to offer more competitive pricing to prospective clients.

Company Background

Through its wholly owned subsidiaries, VTC primarily involved in enterprise IT solutions, including providing implementation services, maintenance, support and professional services as well as resale of hardware and software through mainly for telecommunications, financials, and technology sectors in the Asia Pacific region.

Business Segments

Implementation services (44.65% of FY23 revenue). The group provide implementation of enterprise IT solutions through its technology partners’ software. The group enterprise IT solutions enable adoption of new business models, automate repetitive processes and reduce reliance on manual intervention.

Maintenance, support and professional services (42.63% of FY23 revenue). Postimplementation process, the group will continue to provide ongoing support through maintenance, support and professional services which include maintenance and upgrades of the systems, as well as providing training to clients’ employees.

Resale of hardware and software (12.72% of FY23 revenue). In addition, the group also involved in the resale of hardware and software products as part of the implementation of enterprise IT solutions, where the group purchase the hardware and/or software from its technology partners and resell them to its clients.

Enterprise IT solution provider to implement, maintain and support. Collaborating with global technology partners and vendors allows an enterprise IT solutions company to access advanced technologies and expertise, enabling them to deliver customized and innovative solutions. By leveraging a diverse network of partners, the company can offer scalable and reliable solutions while mitigating risks. Thus, requiring an enterprise IT solution provider to provide upgrade service for their clients. Industry prospects

Positive Enterprise IT services industry outlook. Based on the IMR report from Protégé Associates, the increased adoption of new technologies such as IoT, 5G, AI, Cloud computing, robotics, and big data will be driving the demand for enterprise IT services. The market size for enterprise IT services is forecasted to grow at a CAGR of 5.7% in Malaysia, reaching RM29.5bn by 2028, and a robust 11.4% CAGR in Singapore, reaching SGD89.4bn in the same period. This growth indicates a strong expansion opportunity for enterprise IT service providers, particularly in regions like Singapore, where the market is expected to nearly double in size. The shift towards digital transformation and advanced technology adoption is likely to continue fuelling demand in this sector.

Financials

Decent revenue growth. VTC’s revenue surged to RM23.1m in FY23, up from RM20.1m in FY21, achieving a CAGR of 7.41%. This increase was primarily driven by growth in the implementation services segment as well as the maintenance, support, and professional services segments.

Projecting growth in bottom-line. Moving forward, we project VTC's revenue to grow by 8.5%-20.0%, reaching RM25.1m to RM36.2m for FY24-26f. Meanwhile, core net profit is expected to rise by 7.0%-19.5%, amounting to RM7.0m-RM9.9m, underpinned by the management’s strategy to take on more complex, higher-margin jobs and the increasing demand in the telecommunications and banking sectors, among others.

Valuations

We derive a fair value of RM0.51 (an upside of 104% against the IPO price of RM0.25) for VTC. This fair value is derived by pegging a P/E ratio of 24.0x to the FY25f EPS of 2.14 sen. Although the peer average forward P/E stood at 16.2x, we believe VTC may pegged to higher P/E of 24.0x given its strong PAT margin of more than 28% in FY23 (as compared to average peer margin of 8.8%), coupled with the AItheme upcycle environment. Also, based on the Bursa Technology Index, under the software & services sub-segment, the peer average current P/E stood at 24.26x.

Investment risks

Dependent on Key senior management. Discontinuation of service of the key senior management may disrupt key decision making within VTC’s business operations.

Any difficulties in securing new contracts. Any prolonged difficulties in securing new clients or additional projects from existing clients in a timely manner, may adversely affect VTC’s business and financial performance.

Dependent on Telekom Malaysia as a customer. The loss of Telekom Malaysia as a customer which collectively represents 45.60% of FY23’s revenue, could adversely affect VTC’s business operations and financial performance.

Dependent on skilled IT manpower. Any shortages in the supply of skilled manpower could adversely affect the quality standards and timely delivery of production projects, which in turn may adversely affect VTC’s reputation, business operations and financial performance.

Source: Mplus Research - 12 Aug 2024