ECS Holdings Ltd - Set for a record year; initiate with BUY (OCBC)

Initiating Coverage BUY

Current Price: S$0.765

Fair Value: S$1.08

Playing the volume game with leading IT vendors. ECS Holdings (ECS) is a leading Information and Communications Technology (ICT) products and services provider with a strong presence in six regional countries. The group thrives on developing a strategic and established relationship with major IT vendors, which include Apple, HP and Microsoft. We expect ECS's earnings momentum to gain traction moving forward, as it had recently clinched new distributorship agreements with Dell and also nationwide distribution rights for Apple's iPad and iPhone in China. A full-year of contribution is expected to accrue in FY11. Nevertheless, we acknowledge that the distribution business carries thin margins; hence ECS would have to depend on strong volume growth to enhance its profitability.

Diverse product offerings and extensive distribution channels. Given ECS's long-standing relationships with a number of leading IT principals, it has the ability to distribute a wide and diverse range of commercial and consumer product categories to its customers. This competitive advantage is further boosted by its extensive distribution network comprising of more than 23,000 partners and resellers. Looking ahead, ECS will also continue its efforts to negotiate with vendors on a regional instead of a standalone-country basis to increase its scalability and gain better economies of scale and scope.

Poised for a record year. We believe that ECS is poised for a record performance in FY11, underpinned by factors highlighted earlier as well as increasing focus and penetration in higher growth markets. This is further supported by the continued recovery in the ICT sector, especially in the Asia-Pacific region. Enterprises in these areas are stepping-up their IT infrastructure upgrading to enhance their competitiveness and consumers are armed with an increasing willingness and ability to splurge on popular electronic devices. We are forecasting double-digit growth for both its revenue and core earnings in FY11 and FY12. Our estimates translate to a CAGR of 10.4% and 22.9% for its top-line and core PATMI during the period from FY06 to FY12F respectively.

Attractive valuations; initiate with BUY. We value ECS based on a PER methodology and ascribe its historical median PER of 7x to our FY11F core EPS forecast. This represents a 25% discount to its peers' CY11 PER of 9.3x, which we think is justifiable due to its low free float (10.3%) and trading liquidity. Nevertheless, our fair value estimate of S$1.08 still implies an attractive upside potential of 41.2%, supported by a healthy prospective dividend yield of 5.0%. As such, we initiate coverage on ECS with a BUY rating.