ECS ICT - Continues to shine

We visited ECS recently and came back with a positive view. The outlook of the group remains bright and we expect ECS to record a high single-digit revenue growth in FY12 underpinned by i) higher sales from ultrabook and tablet, ii) better enterprise systems segment, iii) rising smartphone business iv) and a better consumer spending. Its FY12 net profit is expected to growth by a double digit, thanks to higher margin to be enjoyed on its upcoming smartphone business.  Management has earlier guided that the smartphone business will commence in June 2012. We have raised our FY12-FY13 net profit by 2.4% and 4.1% to RM33.5m and RM35.6m, respectively, after taking the new smartphone business into consideration. In line with our earnings upgrade, we have raised our TP to RM1.70 (from RM1.66 previously) based on the unchanged target PER of 6.1x. Maintain OUTPERFORM rating. 

ICT distribution segment is expected to be boosted by higher ultrabook laptop and tablet sales.  ECS is optimistic on its ICT distribution segment and is targeting to grow it by 10% YoY for FY12, underpinned by the increasing number of distribution brands for its ultrabook laptops and encouraging sales in its tablet business. The group has expanded its single ultrabook laptop brand (ASUS) to another three well-known brands (i.e. Lenovo, HP and Dell) in 1Q12. Its tablet business meanwhile is also showing encouraging sales thanks to the new iPad and popular Samsung’s Galaxy Tab series. We expect the ICT distribution segment to record a 7.9% YoY growth in turnover with sustainable GP margin of 4.5%. We understand that  laptop, tablet, and ultrabook sales account for c.60% of ICT distribution segment turnover.

Enterprise Systems remained upbeat. The group is expected to record a similar YoY growth of 8-9% for its enterprise systems products (i.e. server, network systems, data centers and enterprise software), underpinned by higher industry demand for its Cloud Computing products with a sustainable gross profit margin of c.10%. 

Targeting to push its smartphone business in June 2012. We understand the group has recently secured a deal from one of the biggest smartphone makers from China and is targeting to launch it in the Malaysian in June 2012. Despite the deal not being an exclusive distributorship and the smartphone brand already existed in the local market, we however view the agreement positively. With existing strong distribution channels coupled with hundreds of potential phone resellers, ECS could potentially benefit from this new market segment. IDC, the leading provider of data-driven research and analysis in the region, is expecting the smartphone segment to record a sales value of USD1.6b (RM4.9b) in Malaysia in year 2012. We estimate this segment to contribute around RM29.0m for FY12 and marginally higher GP margin than distribution segment. In addition, IDC  Research is expecting Malaysia’s IT spending to record a 5-year CAGR of 9.9% for the period of 2010-2015 (including the smartphone segment) while without the smartphone segment, the CAGR is expected at 6.7%.

Expecting double digit net profit growth in FY12 to RM33.5m (+11% YoY) underpinned by  1) higher sales from its ICT distribution segment driven by better sales of ultrabook and tablets, 2) rising smartphone business 3) better enterprise systems 4) and also a better consumer spending.

Source: Kenanga