VSTECS : Unveiling The Cornerstone Of The Digital Revolution

R e g i o n a l	M o r	n i n	g	N o t e	s			M o n d a y , 10 June 2024
SMALL/MID CAP HIGHLIGHTS							BUY
VSTECS (VST MK)
Unveiling The Cornerstone Of The Digital Revolution					Share Price			RM3.83
VSTECS, Malaysia's leading distributor of ICT products and enterprise solutions, is	Target Price			RM5.02
reaping the fruits of its rapid expansion. In addition to the organic growth from the	Upside						31.1%
device refreshment cycle, it is also enjoying low-hanging fruits from the burgeoning	COMPANY DESCRIPTION
data centre expansion and cloud migration in Malaysia. We see multiple legs of growth
that can supercharge a three-year revenue/core net profit CAGR of 24%/30%. Initiate	VSTECS Berhad, is the leading distributor of
coverage with BUY and a target price of RM5.02.						ICT products to consumers and enterprises in
INVESTMENT HIGHLIGHTS								Malaysia. Founded in 1985, the Group
• Spearheading growth via portfolio expansion. Since its inception as a distributor of	distributes a wide range of ICT products to
both consumer and enterprise and provides IT
personal computers (PC) in 1985, VSTECS has evolved into an established distributor of	services in the form of pre-sales, integration,
ICT products, enterprise systems and ICT services, boasting a diverse clientele base	and post-sales in support of the brands
spanning various industries and encompassing more than 4,000 resellers and channel	represented. The three business segments
partners. VSTECS has achieved uninterrupted profitability in the past 38 years by effectively	are ICT Distribution, Enterprise Systems, and
managing a vast inventory which is currently more than 100,000 SKUs. It has a market share	ICT Services.
of approximately 50% of the brands it represents. Not resting on its laurels, the group has	STOCK DATA
been constantly forging strategic partnerships with global technology giants (with more than
GICS sector					ICT Distributor
50 brands' principals) such as Apple, Nvidia, and Microsoft, solidifying its position as a
leading distributor in Malaysia.								Bloomberg ticker:									VST MK
• The cornerstone of the burgeoning Malaysia DC industry. Notably, data centre (DC)-	Shares issued (m):							356.6
Market cap (RMm):							1,365.8
related revenue contributes 40-50% of its enterprise systems segment. According to Knight
Frank Malaysia, there are over 40 DCs operating in Malaysia with capacities ranging	Market cap (US$m):							290.6
between 100-150MW, and an additional capacity of 1,400MW anticipated over the next 5-10	3-mth avg daily t'over (US$m):	1.2
years (excluding global hyperscalers), which present a blue ocean for VSTECS. Note that	Price Performance (%)
the group has a complete enterprise systems portfolio for DC, which encompasses software	52-week high/low
(virtualisation from VMWARE), IT equipment (network, storage, and servers), cybersecurity,	1mth	3mth	6mth			1yr		YTD
and energy infrastructure (including uninterruptible power supply (UPS) systems and smart
38.8			109.3	185.8		179.6	188.0
cooling systems). Moving forward, management foresees contributions from DC-related
revenue further increasing up to 70% of its enterprise services segment.				Major Shareholders							%
• Riding on twin turbo drivers for ICT − Starlink and AI PC. As Starlink's authorised	VSTECS Holding Ltd									44.9
Sengin Sdn Bhd									12.2
distributor, VSTECS will provide internet connectivity to Tier 2, 3, and 4 cities, rural areas,
and East Malaysia using Starlink's low Earth orbit (LEO) satellites. This initiative supports the	Dasar Technologies Sdn Bhd							8.6
government's goal of 100% internet penetration. With Malaysia's fixed broadband	FY23 NAV/Share (RM)							1.22
penetration at 50.6% as of 4Q23, there is an untapped market of about 4.5m customers	FY23 Net Cash/Share (RM)							0.42
which translates to a total addressable market (TAM) of RM10.4b. Additionally, IDC projects	PRICE CHART
a resurgence in global PC shipments in 2024 following a slump in 2023, marking the start of
a new demand cycle. The new AI chipset notebooks by Intel and AMD in 2H24, along with
replacement cycles, will likely boost demand. The Boston Consulting Group expects AI-	(lcy)			VSTECS BHD			VSTECS BHD/FBMKLCI INDEX	(%)
capable PCs to comprise 80% of the PC market by 2028.					4.50															310
				4.00
								3.50															270
KEY FINANCIALS								3.00															230
							2.50															190
Year to 31 Dec (RMm)		2022	2023	2024F	2025F	2026F
	2.00															150
Net turnover		2770.6	2727.2	3035.6	3413.8	3868.3		1.50															110
EBITDA		79.5	82.7	89.0	111.8	135.9		1.00															70
Operating profit		76.6	79.6	92.2	113.4	136.9		20
Net profit (rep./act.)		59.7	67.4	72.9	89.5	107.9		15			Volume (m)
		10
Net profit (adj.)		59.7	62.9	72.9	89.5	107.9		5
		0
EPS (sen)		16.7	17.6	20.4	25.1	30.3		Jun 23 Aug 23	Oct 23 Dec 23	Feb 24 Apr 24
		Source: Bloomberg
PE (x)		22.9	21.7	18.7	15.3	12.7
P/B (x)		3.3	3.0	2.7	2.5	2.2		ANALYST(S)
EV/EBITDA (x)		16.8	15.1	14.0	11.0	8.9
		Ku Wei Xiang
Dividend yield (%)		1.6	1.7	1.9	3.3	2.8
		[phone]
Net margin (%)		2.2	2.3	2.4	2.6	2.8
		[e-mail]
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		Desmond Chong
ROE (%)		14.5	14.8	14.5	16.3	17.4		[phone]
Source: VSTECS, Bloomberg, UOB Kay Hian								[e-mail]
Refer to last page for important disclosures.																			1

R e g i o n a l M o r n i n g N o t e s

M o n d a y , 10 June 2024

STOCK IMPACT

• 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 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.
• 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 (around 50%) with improved margins from service components. Additionally, VSTECS will expand its role to provide technical support capabilities for select 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.

EARNINGS REVISION/RISK

• We forecast a three-year revenue/core net profit CAGR of 12%/20%, assuming: a) growth from the ICT distribution segment driven by the resurgence of the PC and notebook cycle and strong Starlink adoption in Malaysia, b) growth from the enterprise services segment mainly fuelled by the booming DC market in Malaysia, and c) higher ICT services revenue, which commands higher margins, thereby lifting the group's overall margin. Note that we have yet to account for any potential orders from colocation DCs for IT equipment.

VALUATION/RECOMMENDATION

• Initiate coverage with a BUY recommendation and a target price of RM5.02, based on 20.0x FY25F PE. Given the lack of local listed peers for valuation benchmarking, we use a 1.0x PEG ratio (compared to 2.0x PEG ratio which is the average peak PEG valuation of tech names during the 2021 tech run), reflecting a three-yearnet profit CAGR of 20% from FY23. The booming DC industry in Malaysia, reminiscent of the tech bull cycle in 2021, supports this valuation.

BUSINESS ACTIVITIES

KEY PRINCIPAL RELATIONSHIPS

Source: VSTECS

INDUSTRIES SERVED AND JOB SCOPE

Source: VSTECS

VSTECS' DC PRODUCTS AND SOLUTIONS

Source: VSTECS

Source: VSTECS

Refer to last page for important disclosures.

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R e g i o n a l	M o r	n i n	g	N o t	e s	M o n d a y , 10 June 2024
PROFIT & LOSS							BALANCE SHEET
Year to 31 Dec (RMm)	2023	2024F	2025F	2026F		Year to 31 Dec (RMm)	2023	2024F	2025F	2026F
Net Turnover	2,727.2	3,035.6	3,413.8	3,868.3		Fixed Assets	3.7	1.6	1.0	1.0
EBITDA	82.7	89.0	111.8	135.9			Other LT Assets	57.1	58.6	56.1	51.5
Depreciation & Amortisation	(3.1)	(3.1)	(1.6)	(1.0)			Cash/ST Investment	150.9	149.9	171.4	190.7
EBIT	79.6	92.2	113.4	136.9			Other Current Assets	600.3	668.5	749.7	849.1
Associate Contributions							Total Assets	812.0	878.5	978.3	1,092.2
Net Interest Income/(Expense)	(1.3)	(1.3)	(1.3)	(1.3)			ST Debt	2.5	1.7	1.7	1.7
Pre-tax Profit	82.8	95.9	117.8	142.0			Other Current Liabilities	315.6	326.7	378.6	420.4
Tax	(15.4)	(23.0)	(28.3)	(34.1)			LT Debt	0.0	0.0	0.0	0.0
Minorities	0.0	0.0	0.0	0.0			Other LT Liabilities	4.1	4.1	4.1	4.1
Net Profit	67.4	72.9	89.5	107.9			Shareholders' Equity	456.4	503.8	548.6	618.7
Net Profit (Adjusted)	62.9	72.9	89.5	107.9			Minority Interest	0.0	0.0	0.0	0.0
							Total Liabilities & Equity	812.0	872.2	968.9	1,080.8
CASH FLOW							KEY METRICS
Year to 31 Dec (RMm)	2023	2024F	2025F	2026F		Year to 31 Dec (%)	2023	2024F	2025F	2026F
Operating	107.6	25.6	67.4	58.1			Profitability
Pre-tax Profit	82.8	95.9	117.8	142.0			EBITDA Margin	3.0	2.9	3.3	3.5
Tax	(22.8)	(23.0)	(28.3)	(34.1)			Pre-tax Margin	3.0	3.2	3.4	3.7
Depreciation & Amortisation	1.7	3.1	1.6	1.0			Net Margin	2.3	2.4	2.6	2.8
Associates	0.0	0.0	1.0	2.0			ROA	8.3	8.3	9.1	9.9
Working Capital Changes	49.4	(55.4)	(29.3)	(57.2)			ROE	14.8	14.5	16.3	17.4
Other Operating Cashflows	(1.8)	8.1	7.2	7.4
Investing	0.3	(1.0)	(1.0)	(1.0)			Growth
Capex (Growth)	(3.0)	(1.0)	(1.0)	(1.0)			Turnover	(1.6)	11.3	12.5	13.3
Investments	0.0	0.0	0.0	0.0			EBITDA	4.0	7.6	25.6	21.5
Proceeds from Sale of Assets	0.1	0.0	0.0	0.0			Pre-tax Profit	3.4	15.8	22.8	20.5
Others	3.1	0.0	0.0	0.0			Net Profit	13.0	8.1	22.8	20.5
Financing	(3.6)	(25.6)	(44.8)	(37.8)			Net Profit (Adjusted)	5.4	15.8	22.8	20.5
Dividend Payments	(22.1)	(25.5)	(44.8)	(37.8)			EPS	5.4	15.8	22.8	20.5
Issue of Shares	0.0	0.0	0.0	0.0
Proceeds from Borrowings	(0.8)	(1.3)	(1.3)	(1.3)			Leverage
Loan Repayment	0.0	0.0	0.0	0.0			Debt to Total Capital	0.3	3.8	3.4	3.1
Others/Interest Paid	0.6	(0.1)	(0.1)	(0.1)			Debt to Equity	0.0	6.6	6.1	5.4
Net Cash Inflow (Outflow)	104.3	(1.0)	21.6	19.2			Net Debt/(Cash) to Equity	(25.7)	(23.1)	(25.2)	(25.4)
Beginning Cash & Cash Equivalent	46.6	150.9	149.9	171.4			Interest Cover (x)	62.7	72.6	89.4	107.8
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

Refer to last page for important disclosures.

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R e g i o n a l M o r n i n g N o t e s

M o n d a y , 10 June 2024

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R e g i o n a l M o r n i n g N o t e s

M o n d a y , 10 June 2024

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