ECS Holdings

OCBC on 18 May 2012

ECS Holdings (ECS) reported 1Q12 revenue of S$901.6m (+7.1% YoY) which met our expectations. PATMI slumped 41.0% YoY to $6.2m. Excluding forex and other exceptional items, we estimate that core earnings would have declined 36.1% YoY to S$6.6m, forming 15.2% of our full-year projections. This was below our expectations, due to weaker-than-expected gross margin. Looking ahead, while we expect ECS’s performance to pick up more strongly in 2H12, ongoing macroeconomic uncertainties would continue to form a major risk to its operations, in our view. Coupled with the weak 1Q12 results, we cut our FY12 core PATMI forecasts by 19.9% (FY13 by 17.5%). But even with a lower fair value of S$0.555 (previously S$0.69), we maintain BUY as valuations remain undemanding.

1Q12 core earnings below expectations
ECS Holdings (ECS) reported a mixed set of 1Q12 results, with revenue meeting our expectations but PATMI came in below due largely to weaker-than-expected gross margin. Revenue increased 7.1% YoY to S$901.6m, forming 23.2% of our FY12 estimates. PATMI slumped 41.0% to S$6.2m. Excluding forex and other exceptional items, we estimate that core earnings would have declined 36.1% to S$6.6m, or 15.2% of our full-year projections. Sequentially, revenue fell 2.5% and net profit declined 31.6%.

Lower margins cast a pall on profitability
ECS’s gross margin declined from 5.1% in 1Q11 to 4.0% in 1Q12. This was attributed to a change in sales mix, as its lower-margin Distribution segment constituted a higher proportion of its revenue, while gross margin for this segment also dipped 1.1ppt YoY to 2.8% due partly to competitive pressures. Gross margin was also affected by lower early payment discounts and rebates earned.

Likely a back-end loaded year
We expect ECS’s operating performance to pick up more strongly in 2H12, driven by the following factors: 1) continued recovery from its Thailand operations which was affected by the flash floods, 2) contribution in 2Q and 3Q from some projects for its Enterprise Systems segment which encountered delays in 1Q, 3) higher expected demand for new ultrabook offerings and the launch of the Windows 8 operating system.

Pare estimates and fair value, but maintain BUY
Notwithstanding this, we see the need to cut our FY12 core PATMI forecasts by 19.9% (FY13 by 17.5%) given the weak 1Q12 results and continued uncertainties in the macroeconomic environment. This is based largely on softer gross margin assumptions, but partially mitigated by lower finance costs estimates given ECS’s reduced debt level. Our fair value declines from S$0.69 to S$0.555. Maintain BUY as valuations remain undemanding, with the stock trading at 5.3x FY12F EPS, or half a standard deviation below its 5-year average forward core PER.