· A commendable 9M15 performance. ECS’s 9M15 net profit of RM22.1m (13.1% YoY) came in within expectation and accounted for 69.8% of our full-year estimate. Note that, 4Q generally being the strongest quarter had accounted for c.30%-35% of full-year earnings for the past two financial years. 3Q15 turnover climbed 18.6% YoY to RM465m, mainly boosted by the higher sales volume growth in its PC and mobility products (i.e. smartphones and tables) but partially offset by the lower sales in the enterprise systems and ICT service divisions. PBT, however, dipped 28.7% YoY to RM6.5m with softer margin of 1.4% (vs. 2.3% in 3Q14), no thanks to the weakening in MYR and a lesser favourable product mix. On a 9M15 basis, turnover improved to RM1.4b (23% YoY) with PBT enhanced to RM29.8m (+14.4% YoY) despite recording lower performance in 3Q15.

· A special reward to shareholders. ECS has declared a single-tier dividend of 3.0 sen and a special dividend of 5.0 sen (ex-date: 25-Nov) in conjunction with the group’s 30th anniversary. This translates to a strong 65% dividend payout ratio vs. the usual 32%-37% range that recorded in the past four financial years. While the special dividend is expected to be one-off, the group’s dividend payout policy of 30% on net profit is expected to provide a decent dividend to shareholders in view of its healthy earnings ahead.

· Adopting more stringent forex hedging policy to protect margin. ECS learnt a valuable lesson in 3Q15 when the MYR experienced a high volatility and depreciated 16.5% (against the USD). To minimise impact from the higher forex volatility and protect its margin moving forward, ECS has adopted a more stringent hedging policy for its orders, which is now based on the daily foreign exchange rates instead of the weekly rates used previously.

· Mobility segment continued to shine. The group’s mobility distribution segment has performed exceptionally well since the introduction in late CY13. The segment has contributed c.20% to the group’s total turnover in 9M15 (vs. c.10% a year ago) with a GP margin that is higher than its traditional ICT distribution division of 4%-5%. The strong performance was mainly driven by stronger demand of the midto- lower end smartphones ranger carried by ECS (i.e. Lenovo, Huawei, ASUS, BenQ and etc.). Based on the latest Malaysia IDC’s report, ASUS and Lenovo smartphone sales ranked no.2 and no.3, respectively, thanks to their affordable pricing strategy.

· Adding new wave of products. To further expand its ICT distribution portfolio, ECS is targeting to add wearable products in 4Q15 followed by IoT devices in the 1H16. These new waves of products, which generally command higher margin than the smartphone segment, are expected to provide another boost to its earnings over the next 2-3 years in view of the current technology and demand trend.

· Other growth strategies include growing its Enterprise System segment via working closely with System Integrators and vendors to seek out new private and public sector projects. On top of that, we understand that management is on continued lookout for potential M&A opportunities to further expand its ICT services.

· Maintained Trading Buy call with higher TP of RM1.94 (from RM1.76). Post-result review, we have fine-tuned our FY15/FY16 NPs by -0.1%/+1.6%. Our TP, however, is raised to RM1.94 after we rolled over our valuation base year to FY16E with an unchanged targeted PER of 10.0x, which is in line with the FBM Small Cap Fwd PER of 10.4x. Coupled with a dividend payout of 30%, which translates into a DPS of 5.8 sen or 3.6% yield, the stock could potentially reward shareholders with a decent total upside of c.25%. 

Source: Kenanga Research - 17 Nov 2015