• Global IT spending expected to grow 3.2% in 2014
• Downside potential likely limited
• FY14F dividend yield of 3.5%

IT spending has room for growth

Despite on-going macroeconomic uncertainties, market watcher Gartner Inc. still expects total global IT spending to increase by 3.2% to reach US$3.8t in 2014. This would be driven by positive traction across all major segments, with the strongest growth poised to come from enterprise software (+6.9%). This trend is likely to benefit ECS Holdings, which counts on application software and middleware as one of its key products and services offerings. Although ECS’ recent 1Q14 results fell short of our expectations, this was partly due to a transition in strategy for its Apple business in China towards more focus on the commercial instead of the consumer market. The former carries higher margins but volume is smaller.

Continues to be recognised as a leading IT distributor

ECS has continued to clinch a large number of awards from its strategic partners during 2013. Examples include the ‘Oracle Excellence Award 2013 (APAC)’, ‘Distributor of the Year 2013’ by Asus for its Malaysia operations, and ‘Best Partner Award 2013’ by ZTE for its China business. It also secured more distributorship agreements from companies such as Symantec and Beats. We believe these developments are a strong testament to ECS’ leading capabilities as an IT distributor in the region.

Revise FV upwards to S$0.61; upgrade to HOLD

We lower our FY14 revenue forecast by 13.8% but retain our PATMI projection as we raise our gross margin assumption from 3.7% to 4.1% given ECS’ positive change in product mix towards improving contribution from its higher margin Enterprise Systems segment. Rolling forward our valuations to 6x blended FY14/15F EPS, our fair value estimate is consequently increased from S$0.585 to S$0.61. Coupled with ECS’ 6.1% share price decline since we downgraded it to a ‘Sell’ on 13 Dec 2013 (versus the STI’s 7.2% gain during the same period), we believe downside potential is now limited. Hence, we upgrade ECS to a HOLD. We believe its share price will also be supported by a decent FY14F dividend yield of 3.5%.

Source: OCBC Research - 6 Jun 2014