• MYR1.88 FV based on 10x FY24F P/E. VSTECS is set to continue its growth momentum into FY24, supported by the digital transformation and technology advancements that sustains the demand for the enterprise segment and boosts the recovery in the consumer sector. 7x FY24F P/E (ex-cash P/E of 5.9x) at -3SD from the 5-year mean offers deep value vis- à-vis peers (trading at 10-20x) and is bound for a re-rating given strong cash generation (with ever-growing capabilities) and recurring income in consulting and software & solution services backed by a healthy 5% yield.
• Technological advancement. Delays in the implementation of enterprise systems projects seen in 9M23 should spill-over to growth into FY24, in our view. This is on top of the growing momentum in major networking infrastructure due to the 5G rollout and increasing need of cyber security and cloud computing & services, given the mushrooming of various data centres and artificial intelligence (AI) integration. The public and private sectors are set to continue their usual technology refresh and upgrades in addition to the digitalisation push trends by both the Government and hyperscalers. VSTECS is also venturing into supplying power solutions to data centres to capture the increasing investments in them here.

• ICT distribution to recover while enterprise systems remains buoyant. Both IDC and Gartner predict a recovery in global personal computer (PC) and smartphone shipments into 2024 following two years of contractions. The demand for ICT devices is set to recover after the FY22-23 slumps as the major refresh cycle should come in FY24-25 following the super-cycle in 2020-2021 that elevated the total installed base. Budget 2024 allocations for digital enablement and automation (MYR100m to MSMEs and MYR900m under Bank Negara Malaysia) and accelerated implementation of e-invoicing are the other pull-push factors for ICT products demand.

• Sustainable growth... We forecast a 3-year earnings CAGR of 8.6%, supported by product range expansions in the renewables sector, new distributorship, increasing solution services, and government digitalisation efforts. There is growing recurring income from its managed services and software & solutions offerings to meet surging cybersecurity, AI integration, application development, cloud, and consulting services demand.

• …at undemanding valuations. We ascribe a 10x target P/E on VSTECS, which is still at a discount to local and international ICT products distribution and solutions peers, and system integrators (trading at 10-20x). While we acknowledge that margins are on the lower end, it is the nature of a trading business and serves as an obstacle for new entrants. The growing competency in its software as a service (SaaS) model, full life-cycle cloud service capabilities, and ever-growing enterprise segment and product range are the re-rating catalysts on top of a dividend yield of c.5% and midteens ROEs. Key risks: Weaker-than-expected demand, business failures of one of more ICT principals, slower-than-expected adoption, and receivables risks.

Source: RHB Securities Research - 29 Jan 2024