• Share price has outrun fundamentals
• Time to take profit
• Continue to deepen relationship with IT vendors

Downgrading ECS from Buy to SELL

ECS Holdings’ (ECS) share price has surged 37.5% since we highlighted it as our top tech sector pick on 15 Jul 2013, strongly outperforming the STI’s 5.5% decline during the same period. While we like ECS for its strong management team and long-standing relationships with a number of leading IT principals, we believe its share price has outrun its fundamentals. Moreover, margin pressure remains a concern for 2014. We thus downgrade the stock from Buy to SELL, with an unchanged fair value estimate of S$0.585, pegged to 6x FY14F EPS. Although FY13F dividend yield appears decent at 3.3%, our fair value implies potential total returns of -8.0%.

GDP growth expectations eased

Concerns over the prospective tapering of QE by the U.S. Federal Reserve took its toll on the financial markets of emerging economies in the region. During the latest updated projections from IMF and ADB, both organisations pared their growth expectations on China, Indonesia and Malaysia for 2014. These are countries which ECS has a strong presence in. Meanwhile, Thailand, another of ECS’s addressable markets, is currently facing mass antigovernment demonstrations and we believe this would impact her economy adversely and dampen domestic consumption.

Focus on expanding its product range

Despite the ongoing uncertainties, ECS will continue to deepen its relationship with its major IT principals, creating value for them via its network of more than 23,000 active channel partners. We expect ECS to benefit from new product launches from these IT vendors, such as Apple’s iPad Air and iPhone 5S. It will also aim to grow its higher-margin Enterprise Systems division, which includes networking hardware, servers, software products and enterprise storage.

Source: OCBC Research - 13 Feb 2014