• Enterprise segment focus paying off
• Positive impact from new Apple products
• Upgrade to BUY

The right move to focus on enterprise segment

IDC reported server market revenue and shipments increased 2.5% YoY in 2Q14 to US$12.6b and 1.2% to 2.2m units, respectively. The server market is experiencing the start of an infrastructure refresh cycle as systems that were deployed shortly after the financial crisis are retired and replaced, which is expected to continue into 2015. The top five server vendors including HP and IBM are also ECS Holdings’ (ECS) vendors, and make up ~77% of total worldwide server market share in 2Q14. HP led the market for x86 servers and blade servers’ demand which saw revenue growth of 7.8% and 7.0% YoY in 2Q14, respectively. Since turning its focus from distribution to enterprise segment last year, we believe ECS is poised to capture the growth arising from growing demand for servers alongside with its vendors.

Growth from new Apple products’ launches

Apple remains one of ECS’ key products in its distribution segment, especially in China, contributing more than 10% of ECS’ total revenue. With iPhone 6 likely to be unveiled on 9-Sep-14, sales are expected to commence late Sep-14. Apple forecasted its 4QFY14 revenue to see a 3%-7% YoY increase. We believe the demand for the new iPhones will continue into at least 1H15. Furthermore, we think that the thinner and lighter new MacBook, as well as its new 12.9-inch iPad are likely to be released in 1H15. Given the expected strong pipeline of new Apple products, we think ECS will see growth, especially from distribution segment in China. However, we believe this growth is likely to be partially offset by the decline in PCs and printers distribution business.

FV revised upwards to S$0.68; upgrade to BUY

We believe the technology sector outlook is likely to benefit ECS capturing growth alongside with its vendors. Hence, we revised our FY14 and FY15 PATMI forecast upwards by 2% and 7%, respectively, with an unchanged segmental gross margin assumption. As we expect the growth to be more significant in 2015, we rolled forward our valuations to 6x FY15F EPS to derive an increased new fair value estimate of S$0.68 (prev. S$0.61), supported by a decent FY14F dividend yield of 3.7%. Upgrade from Hold to BUY.

Source: OCBC Research - 29 Aug 2014