Future growth prospects to be driven by large-scale expansions that are on the cards, coupled with favourable industry outlook 

INFOLINE Tec Group Bhd, an ACE-Market-listed information technology (IT) infrastructure and cybersecurity solutions provider with a presence in Malaysia and China, has positioned itself strategically within the high-growth IT industry. 

Its ongoing geographical expansion efforts and capacity expansion plans have bolstered its position to capture a significant market share. 

“Future growth prospects to be driven by relatively large-scale expansions that are on the cards, coupled with favourable industry outlook,” according to Apex Securities Bhd in an initiation coverage of the company. 

In a note dated Nov 22, Infoline Tec is projected to experience a continued growth in core net profit, anticipating a three-year compound annual growth rate (CAGR) of 26.7% to reach RM24.6 million in the financial year 2025 (FY25F). This growth is attributed to the acquisition of new customers and contract wins from a robust tender book. 

In the note, Apex Securities has provided a ‘Buy’ call for the company with a 52-week target price of RM1.15. 

Digitalisation, Govt Initiatives 

The proliferation and evolution of technologies such as big data, cloud computing, and social computing requires a large volume of data consumption and requires greater demand for protection. According to independent market research forecasts, the IT infrastructure industry is expected to grow at a CAGR of 9.7% and 18.4% YoY in CY24 in Malaysia and China respectively. The expectation of a positive trend has positioned Infoline Tec as one of the key beneficiaries from the rapid development of IT infrastructure. We believe the company is strategically positioning itself within the high-growth industry. 

Benefitting from the government’s initiatives to promote the IT infrastructure and cybersecurity industries, the development of digital infrastructure is being encouraged through technology-friendly policies. The Malaysian government’s awareness and promotion of digitalisation and cybersecurity, by development of digital infrastructure is expected to ramp up demand for companies and businesses to invest in IT infrastructure and cybersecurity solutions. 

Customers, Expansion 

Infoline’s ability to secure customers while bolstered by its largest client, Dell Technologies Inc through their substantial planned capital expenditure (capex). Already, Infoline Tec successfully acquired 24 new customers in FY22 and an additional 27 new customers as of June 2023. The group’s ability in new customer acquisition will be a key driver for both top and bottom-line growth, going forward. 

Geographically, Infoline Tec has expanded its operations into China, establishing presence across three cities: Heilongjiang, Wuhan and Chengdu in response to strong demand inquiries. Additionally, Infoline has extended its footprint to Singapore, Japan, and India. The expansion into Singapore revolves around a brownfield acquisition of Inline Technologies Pte Ltd that comes with an annual profit guarantee of approximately RM1.8m. 

Operationally, Infoline Tec has diversified vertically into the mechanical and engineering segment. The group has secured a solar plant project worth RM2 million and is actively tendering projects with a combined value of RM100 million. We believe these strategic expansions will pave the way for Infoline Tec’s growth trajectory. 

Income Stream, Dell Proxy 

Infoline Tec has bolstered its steady earnings stream through managed IT services segment in bid to generate recurring income stream. Year-to-date, the group has enhanced its network operating centre (NOC) and established a new security operating centre (SOC). Addition of several new customers over the years has bolstered the contribution of managed IT services. 

In the first half of 2023 (1H23), the aforementioned segment accounted for 23% of the total contribution, which represents a significant rise from 13% in FY22. We anticipate contribution will maintain at current level (20%) for FY24F. Additionally, the aforementioned segment offers better margins, which boast blended gross profit margin to approximately 70%. 

Proxy to Dell Growth in APAC 

Infoline Tec maintained a mutually long-term working relationship with Dell Technologies, which is the group’s largest customer that contributed approximately 50.0% to total revenue over the years. In recent years, Dell demonstrated sturdy growth in countries such as Australia, Japan, South Korea and India. By tapping into Dell’s growth within the Asia-Pacific (APAC) countries, we reckon Infoline Tec is well positioned to capitalise on the ongoing and future Dell developments within APAC markets, particularly in India. 

Dividend Policy 

In FY22, the group declared a full-year dividend of 2.21 sen per share, reflecting a dividend payout ratio of approximately 66%. Infoline adheres to a dividend policy of a minimum 30% profit payout, backed by its strong financial performance. With ongoing expansionary plans on the horizon, we anticipate the group will maintain a dividend payout ratio of 30% of its profits in the future. 

Financial Highlights 

Over the years, Infoline Tec’s revenue and net profit demonstrated a solid four-year CAGR of 40.2% and 39.2% in FY22. The sturdy growth was largely attributed to the rapid demand for IT infrastructure following the rising adoption of advanced technologies such as data analytics, data processing, data exchange and cloud-based services. The above factors contributed to increase in volume of digital data generated, and consequently lead to continuous demand for IT infrastructure and cybersecurity solutions in order to store and manage digital data. 

Moving forward, we are projecting core net profit to demonstrate further growth, rising 50.4% year-on-year (YoY) to RM18.2 million in FY23F, 20.9% YoY in FY24F and 11% YoY in FY25f on the back of new contracts secured and onboarding of new customers from their strong tender book that is supported by ongoing expansions. 

Seasonally, Infoline Tec posted stronger performance in 2H against 1H, with approximately 60%-70% of their annual profits concentrated in the second half of the financial year. This is premised on companies ramping up their capex spending towards the year-end. Hence, we expect Infoline Tec to deliver stronger 2H23 results. 

Valuation 

We project the company to deliver three-year earnings CAGR of 26.7% for FY22-FY25F. On that note, we have factored in new contracts secured from current and future tenders, backed by their capabilities demonstrated historically. 

We initiate coverage on Infoline Tec with ‘Buy’ recommendation and target price of RM1.15/share, based on assigned P/E of 17.0x to FY25F EPS of 6.8 sen. Our target price-earnings ratio (PER) is based on a 20% discount to peers which are trading at 21x-22x trailing PER, justifiable by the group’s smaller market capitalisation and competitive industry landscape. — TMR

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• This article first appeared in The Malaysian Reserve weekly print edition