ECS ICT - Below expectations

Period   9M12/3Q12

Actual vs.  Expectations    The 9M12 net profit of RM20.6m came in below our expectations and accounted for 61.4% and 60.9% of ours and the street’s full-year estimates respectively. 

Dividends    Announced a single tier interim dividend of 3.0 sen/share.

The ex-date has been set on 26 Nov 2012.

Key Result Highlights    YoY, the 9M12 revenue rose 3.7% to RM942.6m thanks to higher performance from all its three business segments namely ICT distribution (+1.3%), Enterprise systems (+6.2%) and IT services (+9.1%). Enterprise systems and IT services were mainly boosted by higher sales of networking products, enterprise software and the completion of a few project transactions. The group’s net profit meanwhile rose 2.9%  to RM20.3m as a result of improved sales, higher interest income and a lower effective tax rate of 26.1% vs. 26.8% a year ago. 

In the quarter, the group also incurred notable higher distribution expenses of RM23.0m (9M11: RM18.5m) due to its aggressive campaign to recruit resellers for its smartphone and tablet distribution business segment.

QoQ, the 3Q12 revenue inched up by 6% due to seasonality factor. The net profit increased by 16.4% to RM6.5m mainly attributed to stronger sales from its higher GP margin Enterprise Systems segment. The group’s PBT margin and net profit margin have improved to 2.6% and 2.0% respectively (from 2.4% and 1.8% previously) as a result of higher sales in the enterprise system segment.  

Outlook    The lower consumer demand for Notebook PCs coupled with the higher price tag of the popular ultrabook has hurt the sales of its ICT distribution segment. Recently, the group has also started to distribute Google’s Nexus 7 (tablet) to its IT channel retailers with the much anticipated ASUS Padphone 2 and iPad mini to come soon by early next year. We believe this will provide an additional revenue stream to the group in the future. 

The Enterprise segment’s prospect remains bright, underpinned by demand from cloud computing system and data server system, particularly from the telecommunication sector.

Change to Forecasts    Post-results, we have reduced our FY12 and FY13 net profits by 14.6% each  to RM28.6m and RM30.4m respectively after imputing in a higher SG&A margin assumption of 3.8% (vs. 3.5% previously) and a lower revenue growth of 3.0% (vs. 7.9% previously) from the ICT distribution segment. 

Rating   Downgraded to MARKET PERFORM

Valuation   We  have  cut  our  ECS’  TP  to  RM1.03  based  on  a  lower +1SD  FY13  targeted  PER  of  6.1x  (vs.  +2SD  previously) on our adjusted lower FY13 EPS of 16.9 sen due to the more cautious outlook on the ICT distribution segment. 

Risks   Lack of or delays in new ICT products. 

Source: Kenanga