Investment Merits

• Market leader position in the industry and portfolio expansions
• Close relationship with major ICT principals and system integrators
• Riding on various digital transformations
• Robust balance sheet and below peer valuations

Company Profile

VSTECS is a leading distribution hub for ICT products in Malaysia. The  group distributes ICT hardware and software from multiple international  leading ICT principals such as HP, Cisco, and Microsoft. It then  distributes them to end-users and resellers, which typically comprise  system integrators, solutions providers, service providers, corporate  dealers, and retailers. These products include, but are not limited to,  personal computers or PCs, notebooks, smartphones, tablets, printers,  software, network & communications infrastructure, servers, enterprise  software, and power solutions amongst others.

Highlights

Strong relationship. VSTECS has formed strategic partnerships and  established major accomplishments with world-leading ICT principals  like HP, Dell, IBM, Apple, NVidia, Alibaba Cloud, Kaspersky, and Cisco  amongst others. Its wide range of products and strong relationships with  its principals enable the group to achieve better market penetration and  improved bargaining power when making strategic decisions and  recommendations to its client. Additionally, VSTEC’s formidable  accomplishments – coupled with a robust balance sheet position – allows the group to expand its portfolio by securing new distributorships,  eg the recent tie-ups with Huawei and Schneider Electric.

Riding the digital transformation wave. We believe VSTECS will ride  on the Government’s initiatives to drive ICT adoption in the country  through the 12th Malaysia Plan and Malaysia Digital Economy Blueprint  or MyDigital as part of efforts to shift Malaysians and the public sector  towards a more technologically literate and thinking workforce. Hence,  we foresee higher demand for ICT products and services coming from  enterprise businesses and the public sector to upgrade IT facilities to  meet this digital transformation. Additionally, various initiatives under  Budget 2023 – eg the MYR100m SME Digitalisation Grant scheme,  MYR1bn financing fund to automate and digitalise business processes,  and a significant increase in estimated federal expenditure on ICT – will  be the key drivers, in our view.

Expanding its already diversified portfolio. VSTECS recently  enhanced its power solutions portfolio to capture the growing demand  for data centres and green power generation. Through the newly signed  agreement with Huawei Malaysia, it will distribute Huawei’s Data Centre  Facility products and solutions for the development of intelligent, efficient and sustainable data centres. Additionally, VSTECS will also  start distributing Schneider Electric’s power solutions – eg the  uninterrupted power supply or UPS offerings – that are highly  complementary to the core products and services of the group’s  enterprise systems segment. These new ventures, alongside 40%- owned associate ISATEC, means VSTECS is primed to grow its  enterprise and public sector segments, given its in-house capabilities in  IT services and software development.

Enterprise solutions to lead. We think an expected lower consumer  demand for ICT devices – after two superb years following the new  work-from-home or WFH trend – will be cushioned by both enterprise  solutions (as evidenced by strong orders) and public sector orders (due  to Budget 2023 ICT spending). VSTECS is also looking to grow its ecommerce business via alternative channels in collaboration with  telecommunication companies and super-apps to enhance the group’s  distribution reach.

Company Report Card

Results highlights. FY22 revenue increased 5.5% to MYR2.63bn due  to higher project transactions from the public sector and enterprise  solutions segment. Correspondingly, core profit increased 8.5% to  MYR59.7m – mainly due to higher sales and better margins.

Strong net cash position. VSTECS has always maintained a net cash  position since 2010 and possesses a healthy balance sheet (net cash of  MYR33m). Over the past three years, its ROEs ranged between 10%  and 16%. With the expected increase in earnings in FY22-23, we  expect the group’s ROE to stay within this range.

Dividends. While it does not have a dividend policy, VSTECS has a  sturdy track record in paying dividends – at least 30% of annual  PATAMI. From FY19-22, dividends per share have grown along with the  increase in profitability, ranging between 3 sen to 6.2 sen per share.

Management. Longstanding Group CEO/Executive Director Soong Jan  Hsung (who has also served on the board of directors since 2001)  helms VSTECS. Soong began his career as a sales executive with  VSTECS Pericomp in 1987 and has more than 30 years of experience  in the ICT distribution market. He has contributed significantly to the  group becoming Malaysia’s leading ICT hub.

Investment Case

Undemanding valuation. We believe VSTECS’ current valuation is  very undemanding at just 6.8x trailing 12-month P/E (-3SD from the 5- year mean of 9.3x), which should allow it to close the gap with its peers.  Based on an ascribed 9-11x P/E on FY23F-24F earnings, we derive a  fair value range of MYR1.68-2.27. We believe our target valuation is  fair, given that it is still at a discount to VSTECS’ local and international  ICT products distribution and solutions peers, as well as system  integrators. While we acknowledge that margins are on the lower end, it  is the nature of the trading business and serves as an obstacle for new  entrants to this segment. Our ascribed 9-11x P/E is also way below the  KLTEC’s P/E of 20-25x. A decent dividend yield of c.5% is a another  plus point.

Key risks include weaker-than-expected demand for ICT products, a  business failure of one of more ICT principals, slower-than-expected  adoption, and receivables risks.

Source: RHB Securities Research - 16 May 2023