Journey to Wealth
ECS ICT Berhad - Focusing on Enterprise System services
Management guided that the group has successfully redeemed its dwindling PC/Notebook sales with rising revenue contribution from tablet sales in the ICT distribution segment in FY12. On the bright side, ECS believes its Enterprise Systems will continue to shine in CY13 underpinned by: 1) stronger sales from enterprise network systems spurred by emerging mobility solution provided by cloud computing and smartphones in the SME space; and 2) more products/brands that are expected to be introduced in CY13. Post-result briefing, we have: 1) trimmed ICT Distribution segment revenue growth to 7.2% (-4.4%) in FY13 due to the sluggish Notebook PC sales; and 2) raised our GP margin on the Enterprise Systems segment to 10.3% (vs. 9.7% previously) in view of the higher margin recorded in the mobility enterprise solutions. Hence, our FY13-FY14 net profit has been revised down to RM30.2m and RM31.9m respectively (from RM30.4m and RM33.6m previously). We are maintaining our MARKET PERFORM rating with a lower TP of RM1.02 (from RM1.03 previously), based on unchanged targeted FY13 PER level of 6.1x.
Changing products mix. The group's revenue contribution from its biggest Notebook PCs brand - HP has fallen to 40% (vs. FY11: 60%) of its total ICT Distribution segment revenue of RM787.2m (-1.3% YoY) in FY12 due to the weak consumer demand on Notebook PCs. This, however, was partially offset by the higher sales of its mobility tablet devices such as iPad and Samsung Galaxy Tab series, thus bringing the FY12 sales to RM787.2m (-1.3x% YoY). Margin-wise, the segment's GP margin has softened to 4.2% (FY11: 4.3%) as a result of a weaker product mix in FY12. Going forward, ECS is aiming to secure more brands and product variants in the future e.g. 4G LTE-capable tablet/smartphone devices. We expect sales for Notebook PCs continue to dwindle in CY13 as a result of the consumer preference of de-prioritising Notebook PCs purchasing in favor of smartphones and tablets. Given a bearish view on consumer Notebook PCs demand, we have trimmed the segment's revenue growth by 4.4% to 7.2% as opposed to 11.6% previously to align with IDC's latest forecast on Malaysian ICT Spending in CY13 (excl. IT services). All in, we estimate this segment to contribute RM843.9m and RM903.0m in revenues in FY13-FY14 respectively.
Expanding Enterprise Systems product/services portfolio. The division has grown by 8.2% YoY to RM475.5m in FY12 buoyed by stronger sales from enterprise network, database solution, and software applications business. Margin-wise, the division's GP margin has improved to 10.0% (FY11:9.7%), underpinned by stronger sales from the higher GP margin products such as cloud computing enterprise network systems and enterprise software applications. Going forward, ECS plans to introduce more products/services i.e. mobility enterprise solution into its already extensive line-up of enterprise hardware/software solutions. We believe the Enterprise System segment will remain upbeat in FY13 fueled by 1) the emerging mobility solution provided by cloud computing and smart-phones in the SME space; and 2) more products/brands that are expected to be launched in CY13. We have also nudged up our GP margin on the segment to 10.3% (vs. 9.7% previously) as a result of the potential margin expansion contribution from mobility enterprise solutions. We expect the segment's revenue to grow by 8.2% YoY to RM514.5m in FY13.
Targeting opportunities in cloud computing. Management is upbeat on cloud computing future prospect due to its high margin, recurring income and elastic business model. We understand that ECS is looking to work with a few enterprise service providers as referrer to promote cloud computing storage that could be scaled dynamically based on "pay-per-use" and "campaign" basis to >100 existing channel partners. This could potentially add a new recurring income stream for the group via recurring referrer fees in our view. Management indicated that cloud computing could potentially generate a 30% GP margin (or 3x more than the Enterprise System segment). Nonetheless, we have yet to impute any additional referrer income into our forecast as we believe that the potential amount is still insignificant at this juncture.
ECS' long-term outlook remains intact despite the unfavorable consumer preference on Notebook PCs as we believe this could be mitigated by the rising demand for tablet devices. According to IDC forecast, Malaysia's IT spending (excluding IT services) is expected to grow by 7.2% YoY in CY13 mainly attributable to: 1) higher tablet/smartphone sales (+27.1% YoY) and 2) higher telecommunication equipment sales, particularly on the enterprise network (+18.6%). In addition, Malaysia's economic outlook continues to remain encouraging in CY13 judging from the expected 5.3% GDP growth being projected by our in-house economist team.
Source: Kenanga
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