ECS Holdings

OCBC on 16 Aug 2012

ECS Holdings’ (ECS) 2Q12 PATMI declined 24.2% YoY to S$8.1m on the back of a 3.0% fall in revenue to S$823.6m. We estimate that its core earnings fell 23.1% YoY to S$7.4m. Results were below our expectations. Going forward, we continue to expect a sequential improvement in its 2H12 results, given new product launches by major IT vendors and management’s focus to drive its higher-margin Enterprise Systems business. Nevertheless, as the global economic backdrop remains uncertain, we pare our FY12/13F revenue and core PATMI forecasts by 7.1/8.9% and 13.8/14.9%, respectively. This is partially mitigated as we also roll forward our valuations to 5.8x blended FY12/13F core EPS, deriving a new fair value estimate of S$0.52 (previously S$0.555). Maintain BUY on cheap valuations, with the stock trading at FY13F PER of 5.0x and P/NTA of 0.51x.

2Q12 results below expectations
ECS Holdings (ECS) reported a 24.2% YoY decline in its 2Q12 PATMI to S$8.1m on the back of a 3.0% fall in revenue to S$823.6m. Excluding forex and other exceptional items, we estimate that core earnings would have decreased 23.1% YoY to S$7.4m. This set of results was below our expectations. For 1H12, revenue increased 2.0% to S$1,725.2m, forming 44.3% of our FY12 forecast. Core earnings slipped 29.8% (reported PATMI fell 32.5%) to S$14.1m, or 40.3% of our full-year estimate. ECS’s gross margin declined 0.6ppt YoY to 4.5% in 2Q12, although this was an improvement vis-à-vis the 4.0% registered in 1Q12. The YoY decline can be attributed to intense competition in the ICT industry and a change in sales mix as there was higher revenue contribution from lower-margin media tablets and phone devices within its Distribution segment.

Focusing on new product launches and higher-margin business
ECS saw healthy revenue growth from products from Apple Inc, Oracle, ASUS and Lenovo in 2Q12. We believe that these major IT vendors would continue to be a key growth driver for ECS moving forward, given new product launches and the anticipated rollout of Microsoft’s new Windows 8 operating system in Oct this year. Management is also seeking opportunities in mobility/social media and big data and would also focus on its higher-margin business such as enterprise servers, software and networking products and professional IT services. Continued efforts would also be made to strengthen its working capital management. The group’s cash conversion cycle improved from 44 days in 2Q11 to 39 days in 2Q12.

Stronger 2H expected, but macro uncertainties remain
While we continue to expect a sequential improvement in its 2H12 results, we pare our FY12/13F revenue and core PATMI forecasts by 7.1/8.9% and 13.8/14.9% respectively, given the still uncertain global economic backdrop. But we also roll forward our valuations to 5.8x blended FY12/13F core EPS. Our fair value estimate is lowered from S$0.555 to S$0.52. ECS is currently trading at FY13F PER of 5.0x and P/NTA of 0.51x, which is cheap, in our view. Maintain BUY.