INVESTMENT MERIT

Despite posting a less than favourable result in FY16, ECS believes it could benefit from the PC replacement cycle and system upgrading wave in 2017. While we concur with the management's view, we are somehow more conservative given the rising cost of doing business as well as potential prolonged poor consumer sentiment could weight on the group’s near-term performance. Thus, we are merely projecting ECS’s PATAMI to growth by a 2- year CAGR of 2.3% post the results review. Having said that, ECS is still warranted a TRADING BUY in view of its undemanding valuations coupled with a decent dividend yield of c.4%. We fairly valued ECS at RM1.67, based on a targeted FY17E PER of 9.7x.

FY16 – closing softly. ECS reported a lower PATAMI of RM30.1m (- 7.2% YoY) in FY16, no thanks to the lower top-line performance (- 4.2% YoY to RM1.8b) as a result of cautious consumer spending and higher base effect where FY15 was boosted by the exceptional preGST sales. Margin wise, despite lower turnover, its GP and PAT margins still managed to sustain at 5.1% and 1.7%, respectively. The group’s cash and cash equivalent stood at RM110m as of the end FY16 with zero borrowing, translating into net cash/share of RM0.61.

Continued to adopt stringent forex hedging policy to protect margins. The group learnt a valuable lesson in late 2H15 when the MYR depreciated against USD rapidly in a short period of time. Since then, ECS has adopted a more severe forex hedging policy (to start hedging the forex after receiving the PO instead of invoice previously) to protect its margin.

Adding new wave of products. To further expand its ICT distribution portfolio, we understand that ECS is aiming to add more items (i.e. 3D printing, lower end consumer & commercial drones, and etc.) in 2017. Besides, the group also planned to continue to grow its market share in PC, Notebook and Smaphone while exploring new opportunities on Internet of Things (IoT). For the Enterprise segment, ECS intends to invest in latest technology trends to focus on Hyper-Converged Infrastructure and Cyber Security products.

Aiming to outperform the industry growth rate. Despite having a less commendable result in FY16, the group is still aiming higher than the industry performance (where International Data Corporation (IDC) and Gartner are expecting Malaysia ICT spending to growth by c.1.5%-3.0% YoY) in FY17 underpinned by: (i) a replacement cycle in the PC market, (ii) better functionality of premium ultra-mobiles, (iii) higher enterprise system segment performance as a result of system upgrading (as Windows Vista and Office 2007 support are set to end by April 2017 and October 2017, respectively), and (iii) various government's ICT spending initiatives.

Maintained TRADING BUY but with lower TP of RM1.67 (from RM1.94 previously) based on a targeted FY17E PER of 9.7x, in line with the historical 3-year FBM Small Cap average PER. Despite the system replacement cycle that augurs well for ECS, we do not discount rising cost of doing business as well as prolonged poor consumer sentiment may potentially weigh down the group’s nearterm performance. Risk to our call include: (i) lower-than-expected margin as a result of an unfavourable product mix, and (ii) slowerthan-expected ICT and enterprise systems demand.

Source: Kenanga Research - 7 Mar 2017