KUALA LUMPUR (June 10): UOB Kay Hian has initiated coverage on VSTECS Bhd (KL:VSTECS) with a “buy” rating at RM3.83 and target price of RM5.02, and said the stock is reaping the fruit of its rapid expansion.

In a note on Monday, the research house said that in addition to the organic growth from the device refreshment cycle, VSTECS is also enjoying low-hanging fruits from the burgeoning data centre expansion and cloud migration in Malaysia.

UOB KayHian said that VSTECS, as Starlink’s authorised distributor, will provide internet connectivity to Tier 2, 3 and 4 cities, rural areas, and East Malaysia using Starlink’s low earth orbit (LEO) satellites.

It said this initiative supports the government’s goal of 100% internet penetration.

“With Malaysia’s fixed broadband penetration at 50.6% as of 4Q2023, there is an untapped market of about 4.5m (million) customers, which translates to a total addressable market (TAM) of RM10.4 billion,” it said.

The research house said given the lack of local listed peers for valuation benchmarking, it used a 1.0x price/earnings-to-growth (PEG) ratio (compared with a 2.0x PEG ratio, which is the average peak PEG valuation of tech names during the 2021 tech run), reflecting a three-year net profit compound annual growth rate (CAGR) of 20% from FY2023.

“The booming data centre industry in Malaysia is reminiscent of the tech bull cycle in 2021, which supports the use of the above valuation methodology.

“We see multiple legs of growth that can supercharge a three-year revenue/core net profit CAGR of 24%/30%.

“Initiate coverage with ‘buy’ and a target price of RM5.02,” it said.

At the time of writing on Monday, VSTECS rose 2.61% or 10 sen to RM3.93, with 635,800 shares traded.

We anticipate increasing momentum in the ICT Distribution segment as the replacement cycle for pandemic-era devices gains traction, particularly with the impending launch of AI-capable notebooks driving additional demand. Our commitment is to stay ahead of the curve by continuously introducing the latest endpoint devices while broadening our nationwide channel coverage to capture a bigger market share. 

The Enterprise Systems segment remains poised for growth, bolstered by ongoing private sector investments in technology infrastructure and more public sector projects. In addition to higher project-driven revenue streams, recurring income from cloud subscriptions will grow, facilitated by our partnerships with top-tier hyperscalers. With an extensive range of products and solutions, we offer seamless access for enterprises looking to initiate cloud migration or enhance their existing cloud infrastructure. We will widen our offering in areas such as Artificial Intelligence (“AI”), cybersecurity, and DC server solutions to capitalise on the rising demand for these strategic technologies. 

Our newest segment, ICT Services, has experienced a rapid surge driven by increasing demand for cloud and DC services. We are scaling up our resources in this segment to cater for the service requirements for upcoming projects within our Enterprise Systems segment and in preparation for the launch of several DCs in Malaysia over the coming months. 

VSTECS now stands as the leading ICT distributor with service capabilities, playing a central role in the ICT ecosystem. Our strong partnerships and nationwide channel network bridge principals with end-users, and our diverse portfolio positions us for sustained growth while delivering returns to our shareholders, ” he added.