Can ECS Reverse from its Current Downward Movement?

Background and Core Business

ECS ICT Berhad (“ECSB”), an MSC-Status company, and its subsidiaries (“the Group”) started in 1985 with the establishment of ECS KU Sdn. Bhd.. Today, the Group is a leading distribution hub for Information & Communications Technology (“ICT”) products in Malaysia via ECS ASTAR Sdn. Bhd. and ECS PERICOMP Sdn. Bhd.

Listed on the Main Market of Bursa Malaysia Securities Berhad on 15 April 2010, ECSB is an associate company of ECS Holdings Limited, which is one of the leading ICT distributors in Asia Pacific, accessing to a network of more than 25,000 channel partners across China, Thailand, Malaysia, Singapore, Indonesia, the Philippines, Cambodia and Myanmar.

ECSB distributes a comprehensive range of ICT products comprising notebooks, personal computers, smartphones, tablets, printers, software, network and communication infrastructure, servers, and enterprise software from more than 30 leading principals like Hewlett Packard, Asus, Lenovo, Apple, Dell, Microsoft, Cisco, Samsung, VMWare and IBM.

With a nationwide channel network of more than 5,500 resellers comprising of retailers, system integrators and corporate dealers, ECS also provides value-added product support and technical services.

Based on Financial Year (FY) 2015 full year results, ECS achieved RM 1.9 billion turnover, which is considered to be a large size enterprise based on turnover value. Other aspects of the company’s latest financial results are illustrated in the table below.

Over the latest past five Financial Year (FY), ECS’s revenue has been on an uptrend from RM 1.25 billion in FY2011 to 1.90 billion in FY2015 which translates to a 52% increase or an average year to year increase of 11%.

In terms of net earnings, ECS has been quite stagnant from RM 30 million in FY2011 to RM 32.5 million in FY 2015, with a decreasing net profit in between with the lowest net profit at RM 26.8 million in FY2013. Relatively stagnant net profit with an increasing revenue shows the company faces thinning of profit margins over the years due to increasing overheads and cost of revenue.

Net profit margin wise, ECS scores a 1.71%, which is a consider very low for a non-retail based distributor. Return of equity (ROE) wise ECS performs reasonably at 13.72%.

On company’s debt, ECS has an amazing zero total debt to equity ratio, meaning the company has no long term or short term debt. The company’s current ratio is excellent at 2.20 and cash ratio is acceptable at 0.60.

ECS pays a very high 8.03% dividend yield but a higher than average payout ratio of 0.61, which increased two-fold from previous year’s payout ratio of 0.36. This may mean that the company plans to have less capital expenditure and decided to pay most of the earnings to shareholders.

In conclusion, ECS is a large enterprise with good financial fundamental, especially achieving a zero-debt status and consistently increasing revenue. The only downside of its financial performance is on the stagnant net profit.

Looking at the Trailing Twelve Months (TTM) financial performance, it is projected that ECS will experience a shrink in both revenue and net profit, as the company’s three quarterly reports this year have shown decreasing revenue and net profit as compared to their respective quarterly reports last year. This may be the reason for the share price downward trend since May 2016.

Outlook for the share price is still pessimistic unless the company could achieve a strong 4th quarter results, which is unlikely due the dampened economy of Malaysia since the decline of crude oil prices and GST, causing uncertainties thus reducing spending behavior among consumers in Malaysia. The reversal will happen when the company shows signs of increasing revenue as well as net profit.

Next quarterly results announcement should be on the month of Feb 2017 for Q4 results.

iVolume Spread Analysis (iVSA) & comments based on iVSAChart software – ECS IT

On this 6-month weekly iVSAChart of ECS IT, it had broken below its 6-month support level at around RM1.44 with heavy selling as depicted by the three Sign Of Weakness (red arrow) recently.

Although ECS IT is a consistent performer with sound fundamentals but with its breakdown of support level with accompanying volume, it is best to avoid taking position now until we see signs of smart money supporting the market. Patience is virtue here.

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This article only serves as reference information and does not constitute a buy or sell call. Conduct your own research and assessment before deciding to buy or sell any stock. If you decide to buy or sell any stock, you are responsible for your own decision and associated risks.