Epicentre

UOBKayhian on 24 Sept 2012

What’s New
· iPhone 5 launched. Epicentre launched the iPhone 5 in Singapore on 21 September. According to The Straits Times, all stocks at Epicentre’s eight outlets were sold within hours. This is the first time that the iPhone is sold on launch day at retailers other than telcos, allowing customers to buy without signing up for a new mobile contract.
· New business initiatives. Epicentre has rolled out several new initiatives, including: a) a mobile-commerce initiative enabling customers to make purchases using mobile phones via a Quick Response code (QR code) displayed on posters in shopping malls, and b) a new customer relationship management (CRM) database which will improve customer service and drive recurring sales.
· Renegotiates purchasing terms. From 2H12, Apple products sold in Singapore will be purchased in Singapore dollars instead of US dollars. This will reduce Epicentre’s foreign exchange risk and margin volatility. However, under the new terms, we believe Epicentre could receive lower fixed margins in return for lower risk. In Malaysia, Apple products will still be purchased in US dollars.

Stock Impact
· China operations will continue to weigh on earnings. In FY12, Epicentre’s China operations made a pre-tax loss of S$1.2m. Going forward, we do not expect an immediate turnaround in China as Epicentre’s stores are located in new shopping malls which have low foot traffic. We also expect profitability to be hit by rising labour and rental costs.
· Store expansion. Epicentre is set to open one store in Jurong and 2-3 stores in Malaysia by 2013. No new stores are expected to open in China. Epicentre currently has eight stores in Singapore, six in Malaysia and three in China.

Earnings Revision
· Slash profit forecast. We slash our FY13 net profit forecast by 71% due to continued losses in China and lower-than-expected sales forecast.
· 4.2% dividend yield. Assuming a payout ratio of 80%, we forecast FY13 dividend yield of 4.2%.

Valuation/Recommendation
· Maintain SELL with a lower target price of S$0.33 (previously S$0.43), implying a downside of 18.5%. Our target price is pegged at 10.3x FY14F PE, a 20% premium to Challenger’s trailing 12-month PE of 8.6x. Valuation is not attractive at this juncture, with the stock currently trading at 19.1x FY13F PE. We also expect more negative catalysts from Epicentre’s China operations.