ECS Holdings’ revenue jumps 33.8% to S$991.7m in 3Q11

3Q11 earnings below expectations. ECS Holdings reported a mixed set of 3Q11 results with revenue meeting our expectations while net profit was below. Revenue jumped 33.8% YoY to S$991.7m but net profit dipped 33.7% to S$9.1m. Excluding exceptional items, we estimate that core earnings would have decreased 37.8% to ~S$8.0m.

Sequentially, revenue rose 16.8% but net profit declined 14.8%. For 9M11, revenue of S$2.7b represented a 19.5% increase and formed 73.5% of our FY11 estimates; while net profit of S$30.2m (-21.2%) met just 60.9% of our full-year projections. While revenue growth was boosted by the stellar performance in its Distribution segment (+72.7% YoY), this was mitigated by a disappointing 26.9% YoY drop in its Enterprise Systems and IT Services divisions collectively.

Margins take a hit. Gross profit margin of 4.0% in 3Q11 was a decline from the 5.4% and 5.1% recorded in 3Q10 and 2Q11, respectively. This was attributed to a change in product mix as its Distribution segment typically carries lower margins vis-à-vis its Enterprise Systems segment, higher provision for stock obsolescence and lower early payment discounts.

Coupled with increasing financial costs due to larger bank loans and higher interest rates, especially in China and Thailand, its net profit margin suffered a 0.9ppt YoY decline to 0.9% this period.

But improved financial position encouraging.
Nevertheless, a bright spot came from the proactive efforts undertaken by management to improve its financial position. ECS managed to bring down its net gearing ratio from 86.5% in 2Q11 to 73.9% this quarter, although this figure is still slightly higher than management's target of not exceeding the 70% mark. The group also generated positive net operating cashflows of S$31.7m in 3Q11, versus negative net operating cashflows in both 1Q11 and 2Q11.

Maintain BUY. Looking ahead, we believe that the lacklustre macroeconomic environment would likely result in lower discretionary spending on consumer electronics products and a tightening of IT budgets by companies. This is further exacerbated by the flash floods in Thailand, which we believe is ECS's second largest market. As such we pare our FY11 and FY12 core earnings estimates by 25.5% and 27.8%, respectively. In light of the weakened earnings visibility, we also apply a lower valuation peg of 6x (previously 7x) to its FY12F EPS, in-line with its 5-year average forward PER.

Consequently, our fair value estimate is lowered from S$1.04 to S$0.715. But current valuations are undemanding, with the stock trading at 4.0x FY12F EPS and FY12F P/NTA of 0.5x. Hence we maintain BUY on ECS.