M a l a y s i a D a i l y
NEW ECONOMY CONFERENCE HIGHLIGHTS
VSTECS (VSTECS MK)
New Data Centre Initiatives Set To Supercharge VSTECS' Growth
We expect a stronger 2H24, boosted by higher contributions from VMware, along with new revenue from Google Pixel and AWS cloud services, as well as shipments of AI related DC equipment. The stock will also benefit from Budget 2025, which allocates significant funds to promote digitalisation in Malaysia. A key inflection point may occur with the government's rollout of new DC incentives, which could potentially supercharge VSTECS' growth by unlocking its TAM. Maintain BUY. Target price: RM5.02.
WHAT'S NEW
- Expect a stronger 2H24. Recall that VSTECS reported a core net profit of RM29.4m (-4% yoy), accounting for only 40% of our full-year estimate due to the slower rollout of public sector projects in 1H24. Despite this, there was notable growth in the ICT distribution segment (+19% yoy) in 1H24, driven by the strong uptake of Starlink (thousands of units monthly) and a resurgence in PC demand indicating the start of the replacement cycle for devices bought during the pandemic. We expect earnings to catch up in 2H24, supported by:
- the rollout of Google Pixel in Aug 24, with thousands of units delivered since Sep 24, b) new AWS cloud service contributions following its data centre (DC) launch in Aug 24, c) increased contribution from VMWARE under a new agreement (doubling effect), d) shipments of AI-related DC equipment in 3Q24, e) steady adoption of Starlink with the potential rollout of Starlink Mini in 4Q24, and f) seasonally stronger consumer and enterprise spending in 2H24.
- New DC incentives: A strategic inflection point. The Malaysian government is currently restructuring its incentive packages for DC investments to prioritise high-valueactivities that bring broader economic benefits. Treasury Secretary General Datuk Johan Mahmood Merican highlighted concerns that while DCs involve significant capex, they often do not create enough high-skilledjobs and can strain electricity and water resources. To address this, the government will introduce a new investment incentive framework by mid-25,using a "scorecard" approach to assess projects based on factors like job creation, local business linkages, sustainability, and alignment with strategic economic sectors. These incentives will be backed by a RM1b strategic fund designed to cultivate local talent and promote high-valueactivities in the E&E and AI sectors, ensuring long-termeconomic benefits. We believe this could be an inflection point for VSTECS, as it will further accelerate its DC equipment and GPU server deals by multiple folds, growing from the current tens of millions of ringgit.
- Beneficiary of Budget 2025. While details remain sketchy, VSTECS stands to benefit significantly from Budget 2025, which allocates substantial funds from both the Ministry of Education (MoE) and the Ministry of Digital to enhance digitalisation and internet coverage across Malaysia. The MoE's record allocation of RM64.1b includes RM635m for infrastructure upgrades and expanded internet access in public universities, as well as RM270m for improving internet coverage in higher education institutes, rural schools, and AI education initiatives. Meanwhile, the Ministry of Digital is set to receive RM1.3b to promote the digital economy, alongside capital allowances for e-invoicing implementation that encompass ICT equipment and software purchases.
KEY FINANCIALS
Year to 31 Dec (RMm) | 2022 | 2023 | 2024F | 2025F | 2026F |
Net turnover | 2,770.6 | 2,727.2 | 3,035.6 | 3,413.8 | 3,868.3 |
EBITDA | 79.5 | 82.7 | 89.0 | 111.8 | 135.9 |
Operating profit | 76.6 | 79.6 | 92.2 | 113.4 | 136.9 |
Net profit (rep./act.) | 59.7 | 67.4 | 72.9 | 89.5 | 107.9 |
Net profit (adj.) | 59.4 | 62.0 | 72.9 | 89.5 | 107.9 |
EPS (sen) | 16.7 | 17.4 | 20.4 | 25.1 | 30.3 |
PE (x) | 19.3 | 18.5 | 15.8 | 12.8 | 10.6 |
P/B (x) | 2.8 | 2.5 | 2.3 | 2.1 | 1.9 |
EV/EBITDA (x) | 14.0 | 12.5 | 11.6 | 9.0 | 7.3 |
Dividend yield (%) | 1.9 | 2.0 | 2.2 | 3.9 | 3.3 |
Net margin (%) | 2.1 | 2.3 | 2.4 | 2.6 | 2.8 |
Net debt/(cash) to equity (%) | (8.1) | (25.7) | (23.1) | (25.2) | (25.4) |
Interest cover (x) | 151.4 | 62.7 | 72.6 | 89.4 | 107.8 |
ROE (%) | 14.5 | 14.8 | 14.5 | 16.3 | 17.4 |
Source: VSTECS, Bloomberg, UOB Kay Hian
M o n d a y , 4 N o v em b e r 2 0 2 4
BUY
(Maintained)
Share Price | RM3.22 |
Target Price | RM5.02 |
Upside+55.9%
COMPANY DESCRIPTION
VSTECS is the leading distributor of ICT products to consumers and enterprises in Malaysia. Founded in 1985, the Group distributes a wide range of ICT products to both consumer and enterprise and provides IT services in the form of pre-sales, integration, and post-sales in support of the brands represented. The three business segments are ICT Distribution, Enterprise Systems, and ICT Services.
STOCK DATA
GICS sector | ICT Distributor | |||
Bloomberg ticker: | VST MK | |||
Shares issued (m): | 356.6 | |||
Market cap (RMm): | 1,148.1 | |||
Market cap (US$m): | 262.1 | |||
3-mth avg daily t'over (US$m): | 1.4 | |||
Price Performance (%) | ||||
52-week high/low | RM1.28/RM4.52 | |||
1mth | 3mth | 6mth | 1yr | YTD |
5.6 | (19.5) | 22.9 | 145.8 | 143.9 |
Major Shareholders | % | |||
VSTECS Holding Ltd | 45.6 | |||
Sengin Sdn Bhd | 12.2 | |||
Dasar Technologies Sdn Bhd | 8.6 | |||
FY24 NAV/Share (RM) | 1. | |||
FY24 Net Cash/Share (RM) | 0.42 |
PRICE CHART
(lcy) | VSTECS BHD | VSTECS BHD/FBMKLCI INDEX | (%) | ||||
5.00 | 350 | ||||||
4.00 | 310 | ||||||
270 | |||||||
3.00 | 230 | ||||||
190 | |||||||
2.00 | 150 | ||||||
110 | |||||||
1.00 | 70 | ||||||
20 | |||||||
15 | Volume (m) | ||||||
10 | |||||||
5 | |||||||
0 | |||||||
Nov 23 | Jan 24 | Mar 24 | May 24 | Jul 24 | Sep 24 |
Source: Bloomberg
ANALYST(S)
Ku Wei Xiang
+603 2147 1916 weixiang@uobkayhian.com
Desmond Chong +603 2147 1980 desmondchong@uobkayhian.com
Refer to last page for important disclosures. | 12 |
M a l a y s i a D a i l y
STOCK IMPACT
- Margin and market share expansion through new distributorship agreement with VMWARE. Under the new agreement, VSTECS will now have a 100% market share for the distribution of VMWARE solutions in Malaysia (from the previous 50%) with improved margins from service components. Additionally, VSTECS will expand its role to provide technical support capabilities for selected products and customers. We gathered that 20-30%of the VMWARE solution distribution will potentially translate to post-salesICT services, which typically have better margins. With these factors in play, management expects the contribution from VMWARE to grow by multiple legs, despite having to incur talent acquisition cost from absorbing service personnel. Note that VMware holds a market share of about 80% in server virtualisation, which has been instrumental in charting VSTECS's growth as a distributor.
- Potential order from colocation DCs for IT equipment. This order has yet to be reflected in our valuation. Unlike hyperscale DCs that procure their IT equipment directly, VSTECS targets the colocation DCs market, which typically secures its IT equipment from VSTECS. IT equipment encompasses networking, storage, and servers. According to C_TEC and the US Chamber of Commerce, approximately 73% of initial DC capex is attributed to IT equipment. Based on our channel checks, the estimated cost of IT equipment per megawatt (MW) is RM40m-50m.With 200MW of colocation DCs currently under construction, this presents a total addressable market (TAM) of around RM10b. It is worth noting that VSTECS holds a market share of 50% in the enterprise systems distribution in Malaysia, indicating a significant opportunity in this blue-oceanmarket segment. Note that the majority of colocation DCs in Malaysia are still in the construction and mechanical and electrical (M&E) phase. VSTECS has already engaged in this phase by providing UPS systems and smart cooling systems. Typically, this phase takes 1-2years to complete before transitioning to the installation of IT equipment.
EARNINGS REVISION/RISK
- Earnings revision: None.
- Forecasting a three-year revenue/core net profit CAGR of 12%/20%, on the back of assuming: a) growth of the ICT distribution segment is driven by the resurgence of the PC and notebook cycle and strong Starlink adoption in Malaysia, b) growth of the enterprise services segment is mainly fuelled by the booming DC market in Malaysia, and c) increased ICT services revenue, which commands higher margins, thereby lifting the group's overall margin. Note that we have not yet accounted for any potential orders from colocation DCs for IT equipment.
VALUATION/RECOMMENDATION
- Maintain BUY with an unchanged target price of RM5.02, based on 20.0x 2025F PE. Given the lack of local listed peers for valuation benchmarking, we use a 1.0x PEG ratio (compared with 2.0x PEG ratio which was the average peak PEG valuation of tech names during the 2021 tech run), reflecting a three-yearnet profit CAGR of 20% from 2023. The booming DC industry in Malaysia, reminiscent of the tech bull cycle in 2021, supports this valuation.
ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) UPDATES
∙ Environmental
- Electricity withdrawal from main grid reduced by 20% yoy in 2023.
- Solar power constituted 41% of total electricity consumed in 2023.
- 26% reduction in paper consumption.
∙ Social
- Maintaining a 50% male-female composition among total employees.
- The group recorded zero work fatalities over the past nine years.
- 100% local employees.
∙ Governance
- Zero confirmed corruption or harassments cases reported.
- Zero fines or penalties from regulatory authorities.
- 57% of directors are independent.
Refer to last page for important disclosures.
M o n d a y , 4 N o v em b e r 2 0 2 4
KEY PRINCIPAL RELATIONSHIPS
Source: VSTECS
INDUSTRIES SERVED AND JOB SCOPE
Source: VSTECS
VSTECS' DC PRODUCTS AND SOLUTIONS
Source: VSTECS
13
M a l a y s i a D a i l y
M o n d a y , 4 N o v em b e r 2 0 2 4
PROFIT & LOSS
Year to 31 Dec (RMm) | 2023 | 2024F | 2025F | 2026F |
Net turnover | 2,727.2 | 3,035.6 | 3,413.8 | 3,868.3 |
EBITDA | 82.7 | 89.0 | 111.8 | 135.9 |
Deprec. & amort. | (3.1) | (3.1) | (1.6) | (1.0) |
EBIT | 79.6 | 92.2 | 113.4 | 136.9 |
Associate contributions | ||||
Net interest income/(expense) | (1.3) | (1.3) | (1.3) | (1.3) |
Pre-tax profit | 82.8 | 95.9 | 117.8 | 142.0 |
Tax | (15.4) | (23.0) | (28.3) | (34.1) |
Minorities | 0.0 | 0.0 | 0.0 | 0.0 |
Net profit | 67.4 | 72.9 | 89.5 | 107.9 |
Net profit (adj.) | 62.0 | 72.9 | 89.5 | 107.9 |
CASH FLOW
Year to 31 Dec (RMm) | 2023 | 2024F | 2025F | 2026F |
Operating | 107.6 | 25.6 | 67.4 | 58.1 |
Pre-tax profit | 82.8 | 95.9 | 117.8 | 142.0 |
Tax | (22.8) | (23.0) | (28.3) | (34.1) |
Deprec. & amort. | 1.7 | 3.1 | 1.6 | 1.0 |
Working capital changes | 49.4 | (55.4) | (29.3) | (57.2) |
Other operating cashflows | (1.8) | 8.1 | 7.2 | 7.4 |
Investing | 0.3 | (1.0) | (1.0) | (1.0) |
Capex (maintenance) | (3.0) | (1.0) | (1.0) | (1.0) |
Investments | 0.0 | 0.0 | 0.0 | 0.0 |
Proceeds from sale of assets | 0.1 | 0.0 | 0.0 | 0.0 |
Others | 3.1 | 0.0 | 0.0 | 0.0 |
Financing | (3.6) | (25.6) | (44.8) | (37.8) |
Dividend payments | (22.1) | (25.5) | (44.8) | (37.8) |
Issue of shares | 0.0 | 0.0 | 0.0 | 0.0 |
Proceeds from borrowings | (0.8) | (1.3) | (1.3) | (1.3) |
Loan repayment | 0.0 | 0.0 | 0.0 | 0.0 |
Others/interest paid | 0.6 | (0.1) | (0.1) | (0.1) |
Net cash inflow (outflow) | 104.3 | (1.0) | 21.6 | 19.2 |
Beginning cash & cash equivalent | 46.6 | 150.9 | 149.9 | 171.4 |
Changes due to forex impact | 0.0 | 0.0 | 0.0 | 0.0 |
Ending cash & cash equivalent | 150.9 | 149.9 | 171.4 | 190.7 |
BALANCE SHEET
Year to 31 Dec (RMm) | 2023 | 2024F | 2025F | 2026F |
Fixed assets | 3.7 | 1.6 | 1.0 | 1.0 |
Other LT assets | 57.1 | 57.1 | 57.1 | 57.1 |
Cash/ST investment | 150.9 | 149.9 | 171.4 | 190.7 |
Other current assets | 600.3 | 673.4 | 760.2 | 865.9 |
Total assets | 812.0 | 882.0 | 989.7 | 1,114.6 |
ST debt | 2.5 | 1.7 | 1.7 | 1.7 |
Other current liabilities | 315.6 | 331.5 | 389.0 | 437.5 |
LT debt | 0.0 | 0.0 | 0.0 | 0.0 |
Other LT liabilities | 4.1 | 9.1 | 14.6 | 20.9 |
Shareholders' equity | 456.4 | 503.8 | 548.6 | 618.7 |
Minority interest | 0.0 | 0.0 | 0.0 | 0.0 |
Total liabilities & equity | 812.0 | 882.0 | 989.7 | 1,114.6 |
KEY METRICS
Year to 31 Dec (%) | 2023 | 2024F | 2025F | 2026F |
Profitability | ||||
EBITDA margin | 3.0 | 2.9 | 3.3 | 3.5 |
Pre-tax margin | 3.0 | 3.2 | 3.4 | 3.7 |
Net margin | 2.3 | 2.4 | 2.6 | 2.8 |
ROA | 8.3 | 8.3 | 9.0 | 9.7 |
ROE | 14.8 | 14.5 | 16.3 | 17.4 |
Growth | ||||
Turnover | (1.6) | 11.3 | 12.5 | 13.3 |
EBITDA | 4.0 | 7.6 | 25.6 | 21.5 |
Pre-tax profit | 3.4 | 15.8 | 22.8 | 20.5 |
Net profit | 13.0 | 8.1 | 22.8 | 20.5 |
Net profit (adj.) | 4.5 | 17.5 | 22.8 | 20.5 |
EPS | 4.5 | 17.5 | 22.8 | 20.5 |
Leverage | ||||
Debt to total capital | 0.3 | 3.8 | 3.4 | 3.0 |
Debt to equity | 0.0 | 6.6 | 6.1 | 5.4 |
Net debt/(cash) to equity | (25.7) | (23.1) | (25.2) | (25.4) |
Interest cover (x) | 62.7 | 72.6 | 89.4 | 107.8 |
Refer to last page for important disclosures. | 14 |