INVESTMENT MERIT

Trading Buy with 27% upside – Fair Value of RM3.60based on FY21E PER of 16x (+2SD from mean). Aside from order backlogs due to strong end-point device demand, catalysts for the group are: (i) ICT distribution boost from PERMAI and CERDIK initiatives, (ii) potential introduction of Alibaba Cloud products and solutions to Malaysia, (iii) being a possible beneficiary of the RM1.16b immigration systems contract won by IRIS (customer), and (iv) currently trading at attractive FY21E PER of merely 12.5x – offering a laggard angle to the technology sector’s monster rally.

Backlog of orders due to strong demand. Following the Work-From-Home (WFH) trend, demand of endpoint devices has surged. Lead-times for popular endpoint devices like laptops and some tablets have doubled to 4-8 weeks. Building on this demand surge, we believe the seasonal decline in 1QFY21 revenue will be significantly smaller (vs. 1QFY20: -31.3% QoQ). The group’s ICT distribution segment also stands to gain from: (i) the PERMAI initiative – until 31-Dec-2021 (RM2,500 tax waiver for purchase of endpoint devices – e.g.: mobile phones, computers, tablets), and (ii) Tabung CERDIK announced in Budget 2021 (RM150m to provide laptops & tablets for 150k students at 500 schools). CERDIK’s first tranche of devices is expected to be delivered in February – potentially adding a boost to VSTECS’ 1QFY21 topline. Over the next 6-12 months, laptop demand is expected to remain elevated, while the introduction of more 5G-enabled devices will be a boon for the group.

Watch the potent Enterprise Systems (ES) segment – expected to be boosted by accelerated adoption and upgrade of: (i) back-end infrastructure (such as cyber/network security), and (ii) workforce mobility (to support the WFH trend). Separately, in Aug 2020, the group’s major shareholder VSTECS Holdings (Singapore) Limited entered into a partnership with Alibaba Cloud for cloud computing services. Naturally, we believe Alibaba’s range of cloud products and solutions could soon be brought into Malaysia through VSTECS Berhad, which could serve as another share price catalyst. According to an Alibaba Cloud survey, 66% of respondents are more supportive of cloud-based IT solutions for their businesses compared to pre-pandemic and there is still opportunity for greater adoption in Malaysia (72% based on survey) vs. Singapore (87%). Moreover, the RM1.16b immigration system contract secured by IRIS (a customer of VSTECS) could possibly benefit VSTECS given the high amount of software and hardware required. In our opinion, the group’s Enterprise Systems is the segment to watch in FY21.

Signs point towards all-time high FY20 earnings. 4QFY is typically thegroup’s strongest quarter. We expect the same for 4QFY20, reinforced by the 11% QoQ growth of global PC shipment estimate by Gartner (Exhibit 3). In 4QFY20, Lenovo, HP and Dell remained the top brands – accounting for 63.5% of global PC shipment, while the duo (Lenovo, Dell) registered commendable growth of 17% and 22% QoQ, respectively, (refer to Exhibit 4 & 5). VSTECS (1 of 2-3 distributors in Malaysia for the top 3 brands) is a direct beneficiary. Alongside: (i) general practice for corporates to exhaust their yearly IT budget, and (ii) seasonally higher consumer spending (festive buying), we believe the group is likely to close its FY20 with earnings hitting an all-time-high.

TRADING BUY with 27%upside – Fair Value of RM3.60, pegged to 16x FY21E PER (+2SD) – still at c.33% discount to its peers. VSTECS is presently traded at an attractive FY21E PER of merely 12.5x. Riding on the technology sector’s coattails, we think its valuations will re-rate – angling the group as a laggard play. We think our ascribed FY21E PER of 16x (c.64% discount to KLTEC) is more than palatable considering the catalysts

Source: Kenanga Research - 16 Feb 2021