Investment Merits

• Top local data centre (DC) networking provider for financial institutions
• Close relationships with major ICT principals
• Riding on the digital transformation of banks
• Moving up the value chain to participate in hyperscale DC projects

Company Profile

Cloudpoint Technology (CLOUDPT) is an IT solutions provider headquartered in Malaysia, specialising in designing and customising solutions tailored to clients' IT environments and business requirements. It also provides project management, installation, and system integration services, along with professional IT maintenance and network monitoring services. Its offerings primarily encompass enterprise and DC networking solutions, cybersecurity solutions, professional IT services, as well as cloud services and software applications.

Highlights

Strategic acquisition to move upstream in DC solutions. In Feb 2024, CLOUDPT acquired a 75% stake in Unique Central, valued at MYR26.8m (8.4x of 2024F P/E). This acquisition enabled CLOUDPT to expand its offerings, incorporating Unique Central’s expertise in structured cabling and DC facilities. With a proven track record spanning three decades, Unique Central is involved in >100MW of DC jobs and is one of Malaysia's top five providers in this sector, focusing on mitigating operational risks and improving energy efficiency. The acquisition is anticipated to boost CLOUDPT's profitability, with additional profits of MYR1.6m, MYR3.6m, and MYR3.9m in FY24F, FY25F, and FY26F. By integrating Unique Central’s expertise, CLOUDPT aims to reinforce its position as a leading provider of comprehensive technology solutions, particularly in hyperscale DCs.

Record-high orderbook. As of 31 Jan, CLOUDPT achieved a record orderbook level of MYR70m – the highest since its listing. Of the total, MYR60m is anticipated to be recognised in FY24. The orderbook consists of two substantial technology refresh contracts from major financial institutions, each valued at MYR15-20m. These contracts considerably exceed the typical scale of networking and cybersecurity projects, being three times larger. CLOUDPT also recently secured one of the top three local banks as a new client, expanding its market share within the financial services industry. Management expects a recurrence of last year's revenue seasonality pattern, where 60% of earnings will be concentrated in 1H. CLOUDPT also has a robust tenderbook of MYR100m, and anticipates a high success rate. This optimistic outlook highlights its position as a leading local provider of networking and cybersecurity solutions for financial institutions, signalling further growth potential in the year ahead.

Forging strategic partnerships. CLOUDPT has embarked on a strategic expansion by partnering with US-based Arista Networks to strengthen its networking solutions business with high-performance DC-grade and artificial intelligence (AI) networking solutions. To enhance its cybersecurity offerings, CLOUDPT has also initiated new partnerships and go-to-market engagements with industry giants Cloudflare, Crowdstrike, Menlo, and Darktrace. These partnerships are geared towards meeting evolving customer demand for AI-based cybersecurity solutions. In line with its commitment to deliver comprehensive IT services, the company plans to unveil a Security Operations Centre (SOC) by 2H24. This will empower it to provide incident response and remediation, threat intelligence, and compliance services, thereby bolstering its capabilities in protecting clients' digital assets. For CLOUDPT's digital applications and cloud services business, growing demand for ServiceNow offerings has led to at least three ServiceNow projects secured. This segment is expected to contribute 8% of sales in FY24, vs 2% in FY23.

Company Report Card

Results highlights. FY23 revenue rose 22% YoY to MYR110.1m, backed by solid growth across all business segments, with project-based revenue rising 12% YoY and recurring revenue surging 48% YoY. Excluding listing expenses of MYR1.3m, core net profit rose 33% to MYR17.5m on a better product mix.

Strong net cash position. CLOUDPT has a healthy balance sheet, with a net cash position of MYR51m as of 31 Dec 2023. Over the past three years, its ROE was in the range of 55-72%. For FY24-25, we expect ROE to stay at high double digits.

Dividends. CLOUDPT recently established a policy to distribute at least 30% of its PATAMI as dividends.

Management. CLOUDPT is led by Choong Wai Hoong and Yew Choong Cheong, who are both Executive Directors with over 20 years of experience in the IT industry.

Investment Case

Orderbook to fuel robust growth. We like CLOUDPT for its strong financial institution client profiles, wide range of solutions and technology vendors, and asset-light business model. The company is well-positioned to benefit from principal innovations, the increased level of sophistication of threats and regulatory compliance, and robust IT expenses of financial institutions with their digitalisation efforts. We believe the current market valuation of 12.7x FY25F P/E is compelling, backed by its recordhigh orderbook, new customer acquisitions, product range expansion, broader data centre solutions and cross-selling opportunities. Based on an ascribed 17-20x P/E on FY25F earnings, we derive a FV range of MYR0.92-1.08. We believe this is fair, as it would still be at a discount to KLTEC’s FY25F P/E of 21x.

Key risks include dependence on major customers, unexpected delays in implementation, and order replenishment risks.

Source: RHB Securities Research - 15 May 2024