VSTECS distributes a comprehensive range of ICT products supported by a nationwide network of more than 4,600 resellers comprising of retailers, system integrators and corporate dealers. The company also provides value-added product support and technical services. We expect VSTECS to register net earnings of RM58.5m and RM65.1m for FY22 and FY23 respectively. BUY with a target price of RM1.63 based on 9x PER (3-year average) over FY23 EPS, premised on: (i) pent up consumer demand for ICT products following the reopening of economy; (ii) growing cloud subscription and managed services under ICT Services segment to increase recurring earnings visibility; plus attractive dividend yields of 5.5% and 6.1% for FY22 and FY23 respectively.

VSTECS business segments comprise of (i) ICT Distribution; (ii) Enterprise System; and (iii) ICT Services. Over the years, VSTECS has been distributing IT hardware and software to over 4,600 resellers throughout Malaysia. With more than 160 personnel in sales, marketing, and support, the Company has a nationwide distribution network to serve resellers throughout Malaysia. As one of Malaysia’s largest ICT product distributors, the company specialises in the marketing and distribution of many prestigious and leading brands of ICT products, namely, Apple, Asus, Dell, Epson, HPE, HPI, Huawei, Intel, Microsoft and many more. Management guided a shorter replacement cycle for devices should continue to bolster this segment.

VSTECS expects its enterprise services segment to be the key growth area. The company stands to benefit from both front end through distribution of 5G enabled devices and back end through network infrastructure opportunities. Meanwhile, growing cloud subscription and managed services under ICT Services segment to increase recurring earnings visibility. For public cloud, VSTECS is selling subscriptions for Microsoft Azure to customers such as Heitech Padu and Mesiniaga. As for the ICT Services, VSTECS manages more than 15 flagship stores on Lazada and Shopee, fulfilling its customers’ needs for ICT products such as ink cartridges, printers, LCD screens, desktops and notebooks.

In its recent quarterly results, VSTECS 2QFY22 net earnings jumped 31% YoY to RM13m attributed to higher product demand within the Enterprise Systems Segment and ICT Services Segment. Balance sheet is strong with net cash of RM60.3m. We forecast VSTECS to pay dividend of 5.7sen and 6.3sen for FY22 and FY23 respectively based on payout ratio of 36%, translating into yields of 5.5% and 6.1% respectively.

Source: Rakuten Research - 21 Sept 2022