ECS ICT Berhad
Target Price: RM1.66 ↑
Focus on higher margin division
We attended the company’s analyst briefing post FY11 results release and came back with more convictions on the company’s outlook. We believe the company is on the right track in moving into higher stage by focusing on higher margin products as well as better product mix. Reflecting the stronger outlook, we are upgrading our net profit forecasts to RM32.7m-RM34.2m for FY12E and FY13E respectively. Hence, our target price as increased to RM1.66, based on revised FY12 EPS and higher forward PER of 6.1x (+2 SD above its mean).
Focus on higher margin division - Enterprise Systems. Management has reiterated its intention in focusing on the enterprise systems products (i.e. servers; network systems; data centers; and enterprise software) going forward. ECS believes that the division's products are on the right track with the current industry trend, which local companies are tending to move into Cloud Computing thus providing plenty of business opportunities to this division. In addition, the division also able to enjoy a higher GP margin of approximately 10% as compared to its biggest revenue contributor – ICT distribution division of 4%-5%. Not to mention that, its Enterprise Systems segment is a recurring income based revenue as well as exponentially growing segment compared to ICT distribution segment which its revenue contribution is largely derived from the consumer spending sentiment.
Better product mix. The management believes they would find a balance point between lack of demand for consumer notebooks and desktop PCs with the surge in sales for its hot-selling Samsung’s Galaxy Tab series, which is currently selling more than the Apple’s iPad. Meanwhile, the management is pleased with the sales of its recent distributorship products - ASUS’s ultrathin laptop series, which has received well response from consumers since its launches. Despite the slow sales of its desktop PC (e.g. HP) during FY11, because more consumers are more favorable in tablet PC products, the company is able achieve a better product mix with other distributorship products and brands, i.e. Lenovo, Dell, Asus, Samsung, and etc.
Penetrating the smartphone segment. We understand the management is in the final stage to negotiate with few large smartphone makers to secure distributorships of smartphone in Malaysia. If the company successfully entering into the smartphone segment, we believe its ICT distributorship segment could achieve better GP margin due to higher margin contribution from the smartphone segment (>5%, according to the management). Nonetheless, we have yet to include any contribution from this segment to our FY12-FY13 forecast at this juncture.
Cash saved for future business expansion. The company has strong cash pile of RM66.6m in FY11 with zero borrowing. Nonetheless, management has reiterated its intention in retaining its cash for future business expansion.
Continue to pay dividend, nonetheless. Yesterday, the company has declared a single tier final dividend of 8 sen - translate to a dividend payout ratio of 31.8%, which is slightly above its dividend policy that has been set at a minimum 30% payout ratio.