• 2Q14 results within expectations
• Strong worldwide IT spending growth
• FY14F dividend yield of 3.8%

Positive product mix to continue driving profitability

ECS Holdings (ECS) reported a 0.4% YoY increase in its 2Q14 revenue to S$1,021.8m and a 4.5% increase in PATMI to S$9.4m, bringing its 1H14 revenue and PATMI to 49.2% and 46.4% of our FY14 forecasts, respectively. We view this as in line with our expectations, as we believe ECS will have stronger performance in 2H14 due to improving global IT spending expected. The 47.1% YoY jump in its Enterprise segment revenue to S$420.2m and 18.6% YoY increase in its IT Services segment revenue to S$9.9m offset the 18.2% YoY decline in Distribution revenue to S$591.6m. This positive change in product mix improved its gross profit margin by 0.4 ppt YoY to 4.0% in 2Q14.

Positive outlook for global IT spending in enterprise segment

IDC reported a more positive outlook for global IT spending in the second half of 2014 across all major segments. The worldwide IT spending is forecasted to increase by 4.5% in 2014, driven mainly by smartphones as well as the enterprise segment. IT spending growth in China is likely to grow 13% in 2014, with server spending to increase by 7% and software by 9%. Market watcher Gartner also reported that worldwide IT spending is on pace to meet US$3.7t in 2014, a 2.1% increase from 2013. The 2014 growth is forecasted to be mainly driven by enterprise software (+6.9%) and IT services (+3.8%). ECS is expected to benefit from this positive outlook with its strategy to focus on the Enterprise segment, especially when China is a key market for them.

FV remains at S$0.61; maintain HOLD rating

With 2Q14 results within our expectations, we maintain our FY14 revenue and PATMI forecast. The increase in net gearing from 0.37x as at 31 Dec 2013 to 0.68x as at 30 Jun 2014 due to the jump in ECS’ Enterprise business, which is more working capital intensive, led to an increase in short-term bank borrowings. Maintain HOLD on ECS with an unchanged fair value of S$0.61, supported by a decent FY14F dividend yield of 3.8%.

Source: OCBC Research - 12 Aug 2014