INVESTMENT MERIT

1H13 results review. ECS’s 1H13 revenue improved slightly by +1.0% YoY to RM620.8m, thanks to its Enterprise Systems segment (+10.4% YoY) but partially offset by the ICT Distribution segment (-15.9% YoY). Nonetheless, the group’s 1H13 GP margin softened to 6.0% (1H12: 6.5%) as a result of the thinner Enterprise Systems (“ES”) segment margin (8.9% vs. 10.6% in 1H12) due to the absence of a one-off  high margin ES project that was completed in 1H12. The lower gross profit margin coupled with higher administrative expenses resulted in lower net profit of RM11.9m (-13.4%) in 1H13. Although the group’s 1H13 net profit merely accounted for 39.3% and 38.0% of our and street’s full-year estimates respectively, we are maintaing our full-year net profit forecast of RM30.2m in view of the seasonal stronger ES segment contribution during the second half. 

Better outlook in 2H13. Management is foreseeing a better outlook in 2H13 driven by returning consumer demand in the ICT sector and improving public sector initiatives. Hence, ECS is looking to venture deeper into mobility solutions by increasing the number of brands and models to its existing smartphone portfolio. As of 2Q13, the group’s mobility solutions business (tablets and smartphones) has expanded to c.10% of  the group’s 1H13 ICT Distribution segment revenue of RM397.5m. Margin-wise, we understand that the group’s smartphone segment is recorded higher GP margin of c.7% as opposed to the 5% GP margin in the traditional ICT segment.

Potential M&As in the pipe-line?  Management is of the view that the country’s ICT sector outlook depends heavily on the cloud/smart phone segment. Thus, the group does not discount that it could be looking to expand further into these two segments should any M&A opportunities arise in the future. Funding is not an issue in our view with a strong balance-sheet possessing net cash of RM76.6m with zero borrowings as of end-2Q13. 

Fair value remains at RM1.22. We are keeping our ECS fair value unchanged at RM1.22 based on a targeted FY14 PER of 6.7x, at a steep 61% discount to the FBM Small Cap targeted FY14 PER of 11.0x due to its relatively small-market  capitalisation as well as shares liquidity concerns. Dividendwise, we expect ECS to distribute 5.4 sen of NDPS   in FY13, implying 4.6% dividend yield and 32.1% dividend payout, which is in line with the group’s 20.7%-33.2% of dividend payout since listing on Apr-10.

SWOT ANALYSIS

Strength: Market leader for ICT distribution in Malaysia

Weaknesses: Low market cap.

Opportunities: Exploring cloud computing segment. 

Threats: Weak consumer demand for its ICT products.

TECHNICALS

Resistance: RM1.20 (R1), RM1.27 (R2)

Support: RM1.16 (S1), RM1.13 (S2)

Comments:  The stock has completed “Golden Cross” (20-D > 50-D SMA) a few days ago. While the buying volume has slowly pick up, trader may start accumulate after the share price break above RM1.20 (20-day SMA) resistance level.

BUSINESS OVERVIEW

ECS ICT Berhad (Bursa Code: 5162, ECS), which was listed on the Main Market of Bursa Malaysia on 15-Apr 2010 is a leading distribution company for Information & Communications Technology (“ICT”) products in Malaysia with major distribution channels of over 2,500 resellers throughout Malaysia. The main business segment for the company include ICT Products Distribution, Enterprise Systems, and ICT Services, with more than 40 leading principals like Hewlett Packard, IBM, Cisco, Microsoft, Apple, Dell, Oracle, and Samsung.

BUSINESS SEGMENTS

ICT Products Distributor. Covers all major distribution channels through reseller and end user segments. The company has a distribution channel of over 2,500 resellers throughout Malaysia. This segment accounted for 63% of the group’s total revenue in 1H13.

Enterprise Systems. Selling Enterprise Systems products such as Servers and Data Centers, Network Systems, and Enterprise Software. This segment contributed 36% of the group’s total revenue in 1H13.

ICT Services. Provides network and system integration, internet solutions, software support, hardware repairs and maintenance for its customers. This segment accounted about 1% of total revenue of the company in 1H13.
 

Source: Kenanga