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This article first appeared in The Edge Malaysia Weekly on September 24, 2018 - September 30, 2018

IT has been a challenging few years for ECS ICT Bhd as weak consumer sentiment and a slowdown in public sector ICT spending weighed on its financial performance.

However, that has not deterred the ICT and enterprise products distributor from maintaining its dividend policy of paying out at least 30% of net profit as its balance sheet remains healthy. It had zero borrowings and net cash of RM92.6 million as at June 30.

Dividend payouts so far have yielded more attractive returns than conventional bank deposits, and group CEO Soong Jan Hsung believes the company’s shares are worth investing in as they are currently trading far below its net assets per share of RM1.54.

“We continue to offer good dividend yield. When we deliver good results, the share price will appreciate. If it can go back to RM1.40 (a 52-week high), we are talking about a capital appreciation of 40%. Instead of putting money into fixed deposits, investors should consider investing in our shares,” he tells The Edge in an interview.

Year to date, its share price has declined 21% to close at 96 sen last Thursday, valuing the company at RM172.8 million. The stock is currently trading at a historical price-earnings ratio (PER) of 6.9 times and price-to-book value of 0.6 times.

ECS ICT declared total dividend per share (DPS) of five sen for the financial year ended Dec 31, 2017 (FY2017), for a reasonable yield of 3.9%. The total payout represents about 34.3% of its net profit.

Prior to that, it had paid a DPS of 5.5 sen in FY2013 and six sen in FY2014, or a yield of 4.7% and 5.1% respectively. In FY2015, the total DPS payout was even more generous at 11 sen — including a special dividend of five sen — translating into a handsome 7.1% yield.

But notwithstanding the attractive yields, ECS ICT’s tepid performance in the past few years could give investors pause. Revenue declined from RM1.9 billion in FY2015 to RM1.855 billion in FY2017. Meanwhile, net profit slipped from RM32.5 million in FY2015 to RM30.1 million in FY2016, before dipping further to RM26.3 million in FY2017.

The slide continued this year. For the first half ended June 30, its top line declined 16.7% to RM750 million compared with RM900.3 million a year ago. Its bottom line was 12% lower at RM8.7 million, compared with RM9.8 million, which the company attributed mainly to cautious consumer spending ahead of the 14th general election in May and the transitional period when the Goods and Services Tax (GST) was zero-rated from 6%.

Last month, UOB KayHian ceased coverage of the company. It maintained its “hold” call but lowered its target price to RM1.18 from RM1.38, based on the gloomy outlook and lack of catalysts to revive sales growth.

“The impact on consumer sentiment due to the reintroduction of the Sales and Services Tax (SST) on Sept 1 remains uncertain, particularly for ICT products. The 2H2018 outlook is challenging, especially since we suspect margin depression could persist moving forwards,” its analyst Yeoh Bit Kun wrote in an Aug 9 client note. “Moreover, we do not expect the public sector’s ICT spending to increase.”

Soong appears unperturbed. “Don’t worry, I will prove them wrong. Time will tell. With the right steps that we are taking, when the market comes back, we will be ready to go,” he says. He believes the share price will improve when the company regains its business momentum.

“Our products are necessity products; we are not selling luxury items that people can live without. All businesses and people need to buy our products, one way or another.”

He is confident the worst is over and ECS ICT’s financial performance will improve in the second half.

“Yes, our performance in 1HFY2018 was below expectations, but we still have another few more months to go. There is still a chance for our full year FY2018 to at least match, if not better, last year’s (earnings).

“Our current PER of seven times is quite low. Ideally, our shares should be valued at eight to nine times. I wouldn’t say our shares are oversold, but I would like to think that the downside is limited. It has hit bottom,” he declares.

ECS ICT is a 42.76%-associate of Singapore-based ECS Holdings Ltd (ECSH), an ICT distributor in Asia-Pacific with access to a network of more than 25,000 channel partners across China, Thailand, Malaysia, Singapore, Indonesia, the Philippines, Cambodia and Myanmar.

ECSH, in turn, is a wholly-owned subsidiary of Hong Kong-listed VST Holdings Ltd.

ECS ICT’s head office is in an 80,000 sq ft integrated office building cum warehouse in Kota Damansara, Selangor. The group has five sales offices in Penang, Johor Baru, Kuantan, Kota Kinabalu and Kuching.

It has two major business segments: ICT distribution, and enterprise systems and ICT services.

Its ICT distribution division contributed 77.4% to group revenue and 62.3% to gross profit in FY2017. Its target market is the man in the street. ECS ICT distributes notebooks, smartphones, tablets, drones, smartwatches, wearables, printers, software and servers from more than 50 leading principals, including HP, Lenovo, Asus, BenQ, Dell, Oracle, Microsoft, Apple, IBM and VMware. It has a nationwide network of more than 6,000 resellers, comprising retailers, system integrators and corporate dealers.

Its enterprise systems and ICT services division distributes ICT products to resellers, comprising mainly system integrators and corporate dealers. Its product portfolio includes Cisco, Hortonworks, Pure Storage, Nutanix and Paloalto.

These vendors appoint ECS ICT as a distributor, and it resells their products to 400 to 500 system integrators, including locally listed Heitech Padu Bhd and Mesiniaga Bhd.

“They (Heitech Padu and Mesiniaga) are my clients, and they will do complete solutions and sell them to the government and banks, which are the end-users,” Soong explains.

The company intends to increase the revenue contribution from its higher-margin enterprise systems and ICT services segment.

“The contribution from the enterprise division has dropped quite a lot. It used to contribute half [of group revenue]. We need to spend more time and effort here. We want to increase the contribution back [to about 50%] within one to two years. Hopefully, we will see a big improvement from next year,” says Soong.

The government should start spending again on upgrading ICT products, he says. The IT infrastructure and equipment in many agencies, including education, health and defence, are due for renewal, he notes.

“We are living in the new cloud, data analytics and big data environment. All these require bigger storage capacity and full servers to process. We need big and powerful machines to analyse the information for us to make decisions. That’s what the new world is all about.”

 

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