Epicentre

DMG & Partners Research on 19 Sept 2012

WE are upgrading Epicentre from a "neutral" to a "buy" with a TP of S$0.41, pegged to 12x FY2013F earnings. Earnings improvement in the coming results should be a catalyst to stock price. We expect the current Apple mania fad in Asia to spur Apple branded sales. Apple Premium Resellers like Epicentre will continue to see sales grow despite the Apple Online Store as Epicentre is able to offer customers better bundle deals in terms of extended warranty, discounts on associated hardware like speakers, keyboards and accessories. FY2012 earnings were affected by at least S$1 million one-off costs associated with the expansion in China, a new M-commerce platform, a new customer relationship management programme, and forex costs.

Excluding the one-offs, net margins would have come in at 1.1 per cent. We believe our FY2013/2014F net margin forecast of 1.6 per cent/1.9 per cent is conservative . The group has historically offered a dividend payout of 90 per cent and with costs set coming off and earnings starting to kick in, we are confident management will continue to maintain this generous payout.

Epicentre was barely profitable in FY2012 with net margin hovering at 0.3 per cent. This is a far cry from a high of 3.8 per cent in FY2010 and 2.9 per cent in FY2011. Going forward, we have remained cautious and forecasted a slight improvement in net margins to 1.6 per cent and 1.9 per cent for FY2013/2014F respectively. Earnings are expected to be driven by new Apple branded products and ramp up in sales of new stores. We also note that the group has decided to put the brakes on its expansion into China with its current three stores. As at June 2012, the group has 10 stores in Singapore, five in Malaysia and three in China. Going forward, we expect 1-2 new stores in Singapore and Malaysia respectively.

While some investors are concerned over the threat of Apple Online Store eating into Epicentre sales, we do not see a large impact. Customers generally prefer to purchase from Epicentre as they get to touch and feel the actual product, enjoy bundle discounts which include extended warranty and accessories deals which are not offered by Apple.
BUY