This article first appeared in The Edge Malaysia Weekly on April 22, 2024 - April 28, 2024

HAVING identified artificial intelligence (AI) opportunities in Malaysia, SNS Network Technology Bhd now expects a meaningful contribution from its newly ventured data centre fit-out business segment.

Besides selling AI super servers, the ICT system and solutions provider is also involved in testing and commissioning as well as operation and management within the premises of data centres. In short, SNS fills the gap between server manufacturers and server buyers.

The group believes its financial performance will be lifted by the sale of AI super servers based on the selling price of RM1.5 million per unit and a gross profit margin of 15%, which is higher than its existing core business’ gross profit margin of about 5%.

“This is a game changer for SNS, and it’s a new playground. Generative AI is at the beginning of a supercycle,” co-founder and managing director Ko Yun Hung tells The Edge in an interview.

With more data centres being set up in the country, especially in Johor, he believes there will be growing demand for AI super servers. “We are seeing a lot of potential from this, for the enterprise segment,” he shares, noting that several tech firms have expressed interest in these servers.

As cost will be one of the challenges in adopting AI, Ko says SNS can play a role in helping clients navigate the AI journey. “Some customers may not want to worry much about the whole AI journey, so they can just subscribe to our services [instead of buying the super servers]. And the service, maintenance and warranty will be taken care of by us.”

He is of the view that SNS will be able to fend off market competition given its multi-channel and multi-brand strategy. Furthermore, the additional services could fetch better margins for the group.

“If you just sell the hardware, it will be about a 5% to 10% gross profit margin,” Ko says. In comparison, the traditional consumer devices business offers a gross profit margin of about 5%.

Headquartered in Ipoh, Perak, SNS started out in 1998 assembling and supplying desktop and related peripherals mainly to schools and cafés. Over the years, it expanded with the sale of ICT products becoming its core business, along with the provision of ICT services and solutions, device repair and related services, and sale of broadband services.

The group sells ICT products through physical and online stores, namely SNS’ own retail stores iTworld, GLOO and Notebook Plaza, as well as third-party marketplaces, while its commercial channel targets businesses, government agencies and educational institutions.

The ICT products sold include Apple, Intel and Samsung. SNS also established an in-house brand JOI of ICT products in 2014, collaborating with Intel and Microsoft.

SNS debuted on the local bourse in September 2022, raising RM90.72 million. Year to date, its share price has gained 56.3% to close at 37.5 sen last Wednesday, valuing the company at RM604.8 million. The stock is also up 50% compared to its initial public offering (IPO) price of 25 sen.

Of its IPO proceeds, RM28.5 million remained as at Jan 31.

For the financial year ended Jan 31, 2024 (FY2024), SNS’ net profit fell 27% to RM31.96 million from RM43.72 million a year ago, partly due to fewer orders from its customers. Revenue slipped 9% to RM1.28 billion from RM1.4 billion the previous year.

Meanwhile, net margin slipped to 2.5% in FY2024 from 3.1% in FY2023.

The commercial channel was the largest contributor to group revenue at 82%, followed by online stores (9%), physical stores (8%) and services (1%).

The bulk of its revenue — close to 99% — was derived from the sale of ICT products comprising hardware, devices and related peripherals, while the remaining came from the provision of device repair and related services, as well as sale of broadband services.

Ko acknowledges that the retail market was not exciting last year, but the situation is expected to improve this year, underpinned by demand for devices, digital transformations and AI adoption.

“The e-commerce segment is already seeing a U-shaped recovery. We are seeing a lot of opportunities, for example government contracts, as it is about time to upgrade the current devices,” he says.

Last October, SNS announced that it is partnering with Seagate Technology to provide enterprise data storage solutions in Malaysia. In February this year, the group secured a contract from Esri Malaysia Sdn Bhd to offer geographical information system solutions for an undisclosed value.

On plans to open 10 retail stores within three years from its IPO using part of its listing proceeds, Ko says the group is sticking to the target and may look to expand to East Malaysia, apart from the Klang Valley, Johor and Penang.

“We are looking at about RM2.5 million to open 10 stores. So far, we haven’t utilised the fund because the market is not very encouraging,” he explains.

“We open retail stores because we want to provide a complete customer buying experience. Sometimes they want to have a retail place where they can explore. And then later on, when the company wants to buy something, we also have our commercial team to support them.”

Currently, it operates 60 brand stores, seven multi-brand concept stores and 12 consignment counters in Malaysia.

SNS is awaiting the Securities Commission Malaysia’s approval for its proposed transfer of listing status to the Main Market from the ACE Market of Bursa Malaysia, after it met the requirement of having an aggregate net profit of at least RM20 million for the past three to five full financial years, with a net profit of at least RM6 million for the most recent financial year.

The transfer listing is expected to be completed by the second half of the year.

Its net cash position improved to RM89.1 million as at end-January 2024, from RM69.73 million as at end-October 2023. It had gross borrowings of RM32.38 million as at end-January 2024, with a gearing ratio of 0.13 times.

SNS does not have a dividend policy, but it hopes to maintain a dividend payout ratio of about 30%-40%. In FY2024, it paid 0.75 sen dividend per share or a total payout of RM12.1 million, equivalent to a dividend payout ratio of 38%.

Ko and executive director Kelvin Pah Wai Onn each own 32.67% of the company, while executive director Siow Wei Ming holds a 7.33% stake.

Premised on the ongoing AI frenzy, Rakuten Trade gave SNS a “buy” call with a target price of 54 sen based on FY2025 price-earnings ratio (PER) of 15 times, which it says are in line with the company’s industry peers.

The research house expects SNS’ FY2024-FY2027 earnings to grow at a robust compound annual growth rate of 39% driven by new AI server sales and continued growth in its existing ICT business, fuelled by consumer device refresh cycles and ongoing digital transformation in education and commerce.

“In addition, SNS maintains a solid balance sheet, with a gearing ratio of 0.13 times as of 4QFY2024. Coupled with 3% FY2025F dividend yield, SNS is currently an attractive proposition at 11 times FY2025F PER,” it says in an April 15 note.

According to Rakuten Trade, Malaysia currently hosts over 40 operational data centres, with the capacity ranging from 100mw to 150mw each. However, upcoming data centre projects indicate an anticipated additional capacity of 1,400mw over the next five to 10 years, driven by low land and energy costs.

“Considering that each GPU (graphics processing unit) server can only support 10kW of data centre usage, the potential for SNS to seize opportunities in this expanding market is significant,” it highlights.
 

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