Enterprise systems a new pillar of growth for VSTECS

TheEdge Tue, Aug 11, 2020 05:00pm - 3 years View Original


VSTECS Bhd, formerly known as ECS ICT Bhd, is an established distributor of information and communications technology (ICT) products. However, the firm has been flying under investors’ radar as the business is deemed unsexy.

But over the last four years, the group has been focusing more on its enterprise systems business, which generates higher profit margins and is seen as a new pillar of growth.

According to VSTECS CEO Soong Jan Hsung, the group’s revenue reached a peak in 2015 during the smartphone boom in Asia.

“The smartphone market is now saturated in terms of volume. Many of us already own two to three smartphones, so the replacement cycle is not as fast as before,” he tells The Edge in an interview.

VSTECS had in 2016 decided to embark on its journey towards transformation with a focus on growing its enterprise market. This included a major reorganisation within the group, which began to invest more on engineers and product specialists.

The group is starting to reap the gains from the investments. “We started to see stronger contributions from our enterprise systems last year,” says Soong, who has more than 30 years of experience in the ICT distribution market and joined the group in 1987.

VSTECS distributes a wide range of ICT products. It has over 40 leading principals and a nationwide network of more than 6,600 resellers, comprising retailers, system integrators and corporate dealers.

For its enterprise systems business, the group provides solutions such as network infrastructure, unified communications, software integration, data analytics, cloud computing, business continuity, hyperconverged infrastructure and cybersecurity.

Its product portfolio includes names such as Cisco, HP, Dell, VMware, IBM, Hortonworks, Pure Storage, Nutanix and Palo Alto.

“These vendors appoint us as a distributor and we resell their products to system integrators such as Heitech Padu Bhd and Mesiniaga Bhd, my direct clients, which will do complete solutions and sell them to government and financial institutions — the end-users,” Soong explains.

Besides ICT distribution and enterprise systems, VSTECS provides ICT support and technical services in Malaysia.

The group saw its net profit grow 20% to RM29.6 million in the financial year ended Dec 31, 2019 (FY2019), up from RM24.6 million in the previous year.

Notably, within three years, the gross profit contribution from the enterprise systems and ICT services business segments has grown from 37.7% in FY2017 to 52.9% in FY2019 (see bar charts).

He says the profit margin for its enterprise systems business is easily two to three times more than its traditional ICT distribution business.

“Going forward, we are confident that the enterprise segment will continue to grow, and hopefully, make higher contributions to our group.”

Soong points out that despite the Covid-19 outbreak, the demand for enterprise systems remains strong as banks, telecommunication operators and hospitals see the need to upgrade their infrastructure, namely servers, network equipment, security products and storage devices.

“All these are business opportunities that come along with Covid-19. I believe that post-pandemic, many businesses and the public sector will continue to invest,” he says.

 

Cloud computing

Soong notes that across the region, Malaysia is among the countries with the lowest adoption rate of cloud services. But with Covid-19, the adoption level has increased as more business corporations are looking into this area and are more willing to invest into it.

Today, he says, VSTECS supplies data centre equipment — including servers, networks, cybersecurity, storage and enterprise software — to the public and private cloud operators.

“We supply to our resellers, who will help the likes of Petronas and Maxis Bhd, as well as government ministries and agencies, put up their own data centres in Cyberjaya, Selangor or any other location, for them to store all their company data and information.

“For public cloud, VSTECS is selling subscriptions for Microsoft Azure. We are the reseller and distributor of their cloud services. The likes of Heitech Padu and Mesiniaga are also our direct customers. So, if you want a private cloud, I sell you hardware equipment. If you want a public cloud, I sell you subscriptions,” he says.

Listed on Bursa Malaysia’s Main Market, VSTECS is an associate company of VSTECS Holdings (Singapore) Ltd, which, in turn, is held by Hong Kong-listed VSTECS Holdings Ltd.

 

ICT business remains steady

On its ICT distribution business, Soong says VSTECS has been a beneficiary of the Movement Control Order (MCO) as more people have been working and studying from home since the pandemic outbreak.

“Due to the partial lockdown, to enable working from home, whatever [equipment] you need at the office, you need at home too. When you don’t have such equipment, you have to buy them. People need ICT products for video conferencing, everyone needs to have their own smart devices. We are lucky that we are in an industry that is still stable and flourishing,” he explains.

Soong says VSTECS was quite prepared for the Covid-19 situation as it also has an e-commerce business, which saw a surge in traffic volume during the MCO period.

VSTECS today manages more than 15 flagship stores on Lazada and Shopee, fulfilling its customers’ needs for ICT products such as ink cartridges, printers, LCD screens, desktops and notebooks.

“If you go to LazMall, you can see brands like Lenovo, HP and Asus. All these online stores are being managed by us. We have been doing e-commerce for more than a year, and we are very fortunate that it helped us to sail through the lockdown period when online purchases by consumers were very popular,” says Soong.

“Our strength is our stock availability. Nowadays, fast delivery is very important, because customers do not like to wait. Besides, we need to make sure our customers have a good buying experience. We need to respond to their enquiries fast.”

Year to date, shares in VSTECS have gained 60% to close at its all-time high of RM2.31 last Wednesday, valuing the company at RM412.3 million.

The counter staged a strong rebound from its 52-week low of 70 sen on March 19.

Despite its recent strong share price performance, Soong says that VSTECS is still trading at an undemanding historical price-earnings ratio of about 12 times, considering that the group is in a net cash position and has a charter for growth.

“We are transforming ourselves to focus more on enterprise systems. Our group is really entering into a new era, a new phase of growth. It is a company with an ICT business, which is very steady. Then you have the enterprise system, which is a more attractive business. These two segments complement each other perfectly,” he says.

Soong concedes that VSTECS has been under the radar for some time, saying many investors do not fully appreciate the industry that it is in.

“We have been a good company, but we are not seen as an attractive stock. Before the recent rally, our shares had been trading below our net tangible assets (NTA), despite having a 30-year unbroken profit track record,” he says. As at March 31, VSTECS’ NTA stood at RM1.75.

To rectify this perception, VSTECS has gone on road shows since the end of last year, which has resulted in rising interest in the counter.

“Before that, many people perceived us as a company with a low profit margin. However,  not many new players can come in to grab our market share as you need a certain scale and efficiency to be profitable in our business.”

 

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