• Established in 2011, the group is principally involved in IT security and automation solutions, supporting industries like factories, theme parks, and public infrastructure; optimizing operations through integrated functions like security, surveillance, and communications.
• Moving forward, we project the revenue to grow at 11.0-22.3% to RM76.1- RM102.3m for FY24-26f, while the core net profit is expected to increase by 11.7- 26.8% to RM9.8m-RM13.5m, supported by the strong overall outlook for IT security and automation solutions.
• We assign a fair value of RM0.36 per share for TechStore, representing a 80.0% upside from the IPO price of RM0.20. This valuation is based on a P/E ratio of 15x, pegged to the FY25f EPS of 2.43 sen. While this multiple is lower than the forward and historical P/E range of 23.7x to 24.6x for its closest peers, the discount reflects TechStore's smaller market capitalization.

Investment Highlights

The JB-SG Special Economic Zone (JSSEZ). Following the 11th Malaysia-Singapore Leaders' Retreat, the Malaysian and Singaporean governments have signed the highly anticipated agreement to create the Johor-Singapore Special Economic Zone (JSSEZ), leveraging Singapore's strong position as a major MNC business hub, with Johor offering competitive advantages such as an abundance of land, low labour costs, and an attractive tax scheme.

Building up from both ends. The JSSEZ covers nine key zones, totalling over 3,500 km², including Johor Bahru Centre, Iskandar Puteri, Tanjung Pelepas - Tanjung Bin, Pasir Gudang, Senai - Skudai, and Sedenak, along with three newly introduced zones: Forest City, the Pengerang Integrated Petroleum Complex (PIPC), and Desaru. To support the initiatives, the local government will establish an infrastructure development fund, while Singapore will leverage its financial expertise assisting its companies expanding into the JSSEZ.

Bodes well for transportation infrastructure. The establishment of the JSSEZ will require infrastructure development to support the mobility of people within the region. This could translate into large-scale projects, such as the development of LRT, MRT, ART, or BRT systems over the next 3-5 years. These efforts would complement the nearly completed RTS Link, which is set to commence operations in 2026, providing a more comprehensive transportation network for the region.

To benefit from the JSSEZ initiatives. Given the awarded projects related to the RTS Link between Singapore and Johor, the Company aims to seize the business opportunities from the JS-SEZ initiatives by setting up a branch office in Danga Bay, Johor Bahru, which we believe will enhance its timeliness and operational efficiency, while also allowing the Company to expand its geographical reach and offer its services to more potential customers within the region.

The Revival of LRT3. The construction of the five Light Rail Transit 3 (LRT3) stations- located at Tropicana, Raja Muda, Termasya, Bukit Raja, and Bandar Botanik-was revived in Budget 2024 after previously being cancelled. With the solid partnership between TechStore and Setia Utama, the main contractor for the LRT3 line connecting Johan Setia and Bandar Utama, we anticipate that the works for the revived LRT3 stations are likely to be awarded to existing contractors like TechStore due to its familiarity with the project and its continuity.

National Transport Policy (2019-2030). In line with the National Transport Policy (2019-2030), the Malaysian Government aims at advancing the Internet of Things (IoT) within the transport sector by adopting automation and digitalization. Furthermore, the government is actively promoting the creation of an open data platform to enhance data integration across all transportation sectors, along with the introduction of a unified entry pass/payment method for seamless travel.

Business Overview

TechStore operates with two primary revenue streams, focusing on the design and implementation of enterprise IT security and automation solutions. The Company primarily generates revenue through: (i) the provision of turnkey IT security and automation solutions, encompassing design, development, customization, installation, configuration, integration, implementation, testing, commissioning, and enhancement services, and (ii) maintenance and support services for IT hardware, software, and infrastructure. These support services are offered on a preventive, comprehensive, or reactive basis, contributing to the company's recurring revenue.

Future Plans & Business Strategies

Strengthen internal workforce. The Company plans to allocate approximately RM2.7m from the gross proceeds to strengthen its business development team, we believe bolster well for the Company's prospects. Therefore, the Company intends to recruit 14 additional personnel, including 2 managers, 4 senior executives, and 8 executives, to support its future expansion.

Purchase of additional equipment and IT hardware and software. Furthermore, to support its expansion plan, the Company intends to purchase additional equipment like vans, hydraulic lifts, as well as IT software to support its plan. Besides, the Company is working to contribute to a better Environmental, Social, and Governance (ESG) by installing a rooftop solar photovoltaic system; supporting its long-term ESG goals.

Establishment of a branch in Johor. With the awarded RTS link project between Singapore and Malaysia, the company intends to set up a branch office in Danga Bay, Johor Bahru; aim to enhance its operational efficiency and expand its geographical presence. The Company plans to secure a tenancy agreement by Q1 2025, aiming to commence operations by Q3 2025 after renovation work is completed.

Financials

Revenue highlights. The Company's revenue surged from RM29.4m in FY21 to RM62.2m in FY23, achieving a CAGR of 45.5% over the 2-year period. The significant growth was driven by an increase in both design and implementation services, supported by strong demand in its IT solutions segment and its growing recurring revenue. Meanwhile, its margins been on a downward spiral, directly impacted by the (i) increase in labour costs from RM1.7m in FY21 to RM2.8m in FY23; the latter was due to the commencement of new projects, like PSDS Project, AFC Project, PAMS Project, and RTS ERP Project, as well as work carried out for the ongoing LRT3 Project and (ii) the increase in the cost of sales for its recurring revenue streams contributed to the decline.

Earnings forecasts. Given the strong outlook for IT security and automation solutions, we forecast 3-year earnings to reach RM9.8m, RM12.1m, and RM13.5m, representing a CAGR of 20.6%. We believe the company is well-positioned to capitalize its strong relationship with Setia Utama, in securing more contracts following the LRT3 revival, while Penang LRT Project another stepping stone for the Company. We believe the establishment of its Danga Bay, Johor Bahru branch will bode well in terms of operational efficiency and the opportunity to expand its client base, as the JSSEZ initiatives are likely to drive demand for transportation systems such as LRT, MRT, ART, or BRT over the next 3-5 years. This would, in turn, require the company's IT solutions, such as automated fare collection systems.

Valuations

We assign a fair value of RM0.36 per share for TechStore, representing a 80.0% upside from the IPO price of RM0.20. This valuation is based on a P/E ratio of 15x, pegged to the FY25f EPS of 2.43 sen. While this multiple is lower than the forward and historical P/E range of 23.7x to 24.6x for its closest peers, the discount reflects TechStore's smaller market capitalisation.

Investment Risk

Dependent on major customer, Setia Utama. Setia Utama, the main contractor for LRT3, has been the Company's major customer since 2019, contributing over 60% of its revenue on average under the Financial Years Under Reviews. Failure to secure new contracts of similar value could significantly impact the Company's future prospects.

Dependent on its ability to secure new projects. There is no guarantee that the group will be able to secure new projects as it derived the majority of its revenue from projects which were non-recurring in nature, and most of its projects were awarded on a project- by-project and potentially one-off basis.

Inability to complete projects in a reliable and timely basis. Inability to deliver or perform the contractual works within the time specified in or in accordance with the contract will have an adverse impact on the group's reputation, business, financial condition and results of operations.

Dependent on registration and licenses. Inability to maintain or renew its certificates of registration like CIDB and Energy Commission Malaysia, the group will be restricted or prohibited from providing its IT security and automation services, thereby adversely affecting its business and financial position.

Source: PublicInvest Research - 31 Jan 2025