INVESTMENT MERIT

9M13 results hit by unfavourable forex. ECS’s 9M13 revenue improved slightly by +2.4% YoY to RM965.0m, thanks to its ICT Distribution segment (+2.1%) and Enterprise Systems segment (+3.4% YoY). The 9M13 GP margin, however, softened to 5.9% (9M12: 6.5%) as a result of an unfavourable foreign exchange rate and thus, leading its net profit lower to RM17.2m from RM20.2m a year ago.

Trimmed FY13 earnings by 8.2% but keeping our FY14 forecast unchanged. We have trimmed our FY13 net profit forecast by 8.2% to RM27.7m in view of its weaker-than-expected 9M13 results which only accounted for 56.9% of our previous fullyear estimates. Nevertheless, the group is expected to record a stronger result in 4Q due to a seasonality factor where the group’s 4Q normally accounted for about 29%-36% of its full-year earnings based on historical trends.

Smartphone segment continues to gain traction. ECS is expecting its smartphone segment to continue gaining traction and record RM15m turnover in 4Q13, bringing the segment’s full-year turnover to RM40m. Management believes the strong growth will be underpinned by the expected increasing demand of its better smartphones product mix (i.e. Samsung, Lenovo, Hwawei and ASUS’s Padfone) from its enterprise segment customers and IT retail channel resellers. Margin-wise, the segment is expected to generally a higher GP margin of 5%-7% as compared to the traditional ICT product's margin of 4%-5%. We have incorporated the above assumptions into our financial model.

Positive impact from the recent announced Budget 2014. According to budget 2014, cost of purchasing ICT equipment and software is allowed as Accelerated Capital Allowance (ACA) to up to 100% (vs. 16% annually) until the year of assessment 2016. Management believes the new policy will encourage more companies to invest in new ICT products in order to further enhance their efficiency as well as productivity. Meanwhile, management also expects the group to benefit from the pre-GST preparation in which demand for ICT equipments tends to increase during the period.

Fair value remains at RM1.22. We are keeping our ECS fair value at RM1.22 based on an unchanged targeted FY14 PER of 6.7x, at a steep 59% discount to the FBM Small Cap targeted FY14 PER of 11.4x due to its relatively small-market capitalisation as well as shares liquidity concerns. Dividend-wise, we expect ECS to distribute 5.4 sen of NDPS (or 32.1% dividend payout) in FY13, 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: RM1.40 (R1), RM1.30 (R2)

Support: RM1.20 (S1), RM1.15 (S2)

Comments: The stock has pull back from recent record high @RM1.40 and currently is diving into range-bound cycle between RM1.25-RM1.15 as profit taking activity takes place. Immediate support is pegged at RM1.20.

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 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 9M13.

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 9M13.

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 9M13.

Source: Kenanga