• MYR1.64 FV based on 9x FY23F P/E. VSTECS is riding on the relentless digital transformation wave in the private and public domains, which we think will sustain the strong demand for its products – especially in the enterprise segment – which should lead to another year of record earnings. We expect the Government to continue promoting digitalisation efforts in the upcoming Budget 2023. Its FY22F ex-cash P/E of 4.8x is a steep gap from its peers’ valuations of 10-20x trailing P/Es. A cash cow like VSTECS deserves a valuation re-rating, on the back of healthy yields of 5-6%.

• Riding the digital transformation wave. VSTECS stands to benefit from Budget 2022 allocations for digital enablement, ie the MYR700m and MYR200m allocated to increase digital connectivity (especially in rural areas) and SME digitalisation – to digitalise manual processes and documents. Consequently, it received numerous inquiries from businesses rushing to implement post-lockdown digital infrastructure. We expect the enterprise segment to continue recording growth, supported by strong enterprise project sales pipelines and public policies.

• Lower consumer demand cushioned by public sector and others. Despite the expected lower consumer demand for ICT devices after two superb years following the new work-from-home (WFH) trend, VSTECS’ on- hand orders for personal computer (PC) notebooks – especially from the public sector – will be the main driver for its FY22 ICT devices sales revenue, in our view. Under Budget 2022, the Government extended special tax exemptions to individuals, of up to MYR2,500 for device purchases, and consumers tend to utilise their budgets in the 4Q of any given year.

• We forecast a 3-year earnings CAGR of 10.2%, supported by expansions in product range and distribution channels, the rollout of 5G services, and the Government’s digitalisation efforts. We also noticed the surge in demand for cybersecurity, cloud computing, and data centre products. With these factors in mind, VSTECS’ enterprise systems business should continue to grow faster than its ICT distribution wing in the near future – hence improving the product mix, as it fetches higher margins.

• Closing the valuation gap. We believe VSTECS’ current valuation (net cash of MYR60.2m) is very undemanding, at just 6.2x trailing 12-month P/E (-3SD from the 5-year mean of 9.3x). This is despite its market leadership and representation of all world-renowned ICT brands, strong earnings delivery track record, and sustainable growth prospects. TD Synnex (SNX US, NR), which is in the Top 3 of ICT products and enterprise systems distribution here, trades at 20x. VSTECS’ indirect local ICT product resellers and solutions players – eg SNS Network, Heitech Padu, and Mesiniaga – currently trade at 10-13x P/E. The gap between VSTECS and its international and local indirect peers is too steep, especially with its higher profit margins and ROEs, and healthier balance sheet. Key risks: Business failure of its ICT principals, slower-than-expected ICT adoption, ICT products adoption slowdown among consumers, and FX risks.

Source: RHB Research - 5 Oct 2022