Summary
2QFY24 core net profit stood at RM1.3m (+499.1% qoq, -63.5% yoy), bringing 1HFY24 CNP of RM1.6m (-74.4% yoy), came below our expectation, constituting only 10% of our full year forecasts due to lower sales from IT infrastructure solutions secured during the quarter and the absence of high-margin network consultancy service projects.
Looking ahead, we anticipate a margin and earnings recovery to kick in only from FY25F.
We maintain our HOLD recommendation with unchanged target price of RM0.905 by pegging PE multiple of 17.0x to FY25F EPS of 5.3 sen.
Results Review
Results review. In 2QFY24, net profit declined -63.5% yoy but improved significantly by 499.1% qoq to RM1.3m, mainly due to a low base recorded in the previous quarter. The weaker yoy performance was attributed to lower margins across all key segments and increased administrative costs. Meanwhile, revenue for the quarter grew 21.3% yoy, and -12.5% qoq decline to RM19.6m.
Missed expectation. 1HFY24 core net profit fell short of our expectations, accounting to only 10% of our full-year earnings forecast. Despite the seasonally softer first half and our expectations of a stronger second half, we opined that the performance was below our expectations. The shortfall was primarily due to lower sales from IT infrastructure solutions secured during the quarter and the absence of high-margin network consultancy service projects.
Operation Highlights. Aggressive expansion strategies, including competitive pricing, resulted in a 2.9% yoy decline in gross profit margin. Additionally, margins were impacted by M&A activities and increased staff headcount and salaries to support future business growth, resulting in 62% yoy rise in administrative costs. However, we are encouraged by the steady growth in the cybersecurity segment (PBT +145% qoq) and managed IT segment (PBT +299% qoq), reflecting the Group's successful efforts in these segments’ expansion.
Industry Highlights. The Cybersecurity Bill 2024, which was passed by the Malaysia government and came into force on 26 August 2024, mandates compliance requirements for designated entities across 11 sectors, prompting businesses nationwide to place a greater emphasis on cybersecurity. This legislation creates significant opportunities for Infotec in its cybersecurity segment and its Security Operation Center (SOC) offerings.
Outlook. The Group pursued aggressive expansion through competitive pricing strategies and capacity increases, aiming to attract new clients and conversion into recurring customers by offering Managed IT services. However, we acknowledge that this strategy will take time to yield results and could result in short-term margin uncertainties. Despite that, we anticipate improve 2H performance 2H, which is a seasonally stronger period as customers typically ramp up their capital expenditures.
Valuation. We revised our earnings forecast for FY24F downward by -41% to RM9.7m, due to reduced revenue expectations from the IT infrastructure segment and lower margin expectations for both the managed IT and IT infrastructure segments, following weaker-than-expected quarterly results. However, we maintain our FY25F forecast at RM19.3m and introduce a FY26F earnings forecast of RM25.4m (+32% yoy), anticipating margin recovery with increased contributions from cybersecurity and managed IT segments as a result of expansion efforts and strategic initiatives. We maintained our HOLD recommendation on the Group with an unchanged target price of RM 0.905, by pegging FY25F EPS of 5.3 sen to P/E multiple of 17.0x.
Risk. Revenue growth lags behind escalating costs due to expansion.
Disclaimer
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Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.449296 | 4.484012 |
| EUR | 4.692599 | 4.701308 |
| CNY | 0.615732 | 0.616932 |
| HKD | 0.571606 | 0.576092 |
| SGD | 3.310067 | 3.336427 |