Valuation / Recommendation

We have a SUBSCRIBE recommendation on VETECE Holdings (VTC) with an FV of RM0.42 based on 20x FY25F EPS, translating to a 66% upside to the IPO price. Our target PE is at a discount compared to the average valuation of comparable IT peers on Bursa Malaysia, but in line with that of smaller-cap firms. We like VTC for its exposure to AI-driven growth and the scalability potential of its IT business.

Investment Highlights

Growth catalyst on AI adoption. VTC is an enterprise IT solutions provider that assists clients in the implementation process as well as provides ongoing support and maintenance services. In recent year, its key technology partners (i.e. Oracle, Salesforce, Teradata and WSO2) have already started offering AI capabilities in their enterprise IT solutions. We believe that the adoption of AI will be a significant factor driving strong revenue growth of 26-32% p.a. for VTC in FY25-FY26F, as its key customers in the banking and telco industries will be among the first to implement AI solutions into their IT systems. With a stronger balance sheet and an enhanced corporate profile post-IPO, we believe VTC will also now be able to bid for and secure larger IT projects compared to before.

Re-capturing overseas customers. VTC has prior experience delivering and accomplishing projects from overseas customers, even though most of its revenue comes from local clients in FY23. This is due to the impact of the COVID-19 pandemic on the company's ability to travel to overseas clients' locations, which has affected service quality and business opportunities previously. To win back overseas customers, VTC intends to strengthen its operations in Singapore by establishing an office and hiring new staff. Furthermore, a Center of Excellence (COE) for software solutions will also be set up in Malaysia. By aligning the COE's security policies with international standards, VTC will then be capable of handling projects for overseas clients remotely from Malaysia.

Hiring spree to add 20 new technical staff. VTC will use most of the IPO proceeds to hire up to 20 new technical staff across three initiatives. This would expand its workforce by about 23%. The new hire will include four sales and marketing personnel who will also help to drive sales in addition to the existing four key senior management.

Risk factors for VTC include (1) High dependency on Telekom Malaysia as major client, (2) Reliance on technology partners, and (3) Cybersecurity and reputation risks.

Source: Mercury Securities Research - 13 Aug 2024