osk-report-19sep12-epicentre-wr9203032645550591cdf654c9

7/28/2019 osk-report-19sep12-epicentre-wR9203032645550591cdf654c9

1/5

September 19, 2012

DMG & Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporatefinance or its dealing activities; this report is therefore classified as a non-independent report. Please refer to important disclosures atthe end of this publication.

See important disclosures at the end of this publication 1See important disclosures at the end of this publication

OSK ResearchOSK ResearchDMG Research

DMG Research

SINGAPORE EQUITYInvestment Research

DMG & Partners Research Corporate UpdatePrivate Circulation Only

CONSUMERMelissa Yeap+65 6232 [email protected]

EPICENTRE BUY Price S$0.355

Terence Wong, CFA+65 6232 [email protected]

Previous S$0.310

Target S$0.410

RETAIL

Epicentre is the leading Apple PremiumReseller in Asia. It has a network of 18 storesacross Singapore, Malaysia and China

Stock Profile/Statistics

Bloomberg Ticker EPIC SPSTI 3,071Issued Share Capital (m) 93Market Capitalisation (S$m) 3352 week H | L Price (S$) 0.558 0.300Average Volume (000) 17YTD Returns (%) -21.1Net gearing (x) 0.2Altman Z-Score 7.2ROCE/WACC 3.5Beta (x) 0.6Book Value/share (S$) 0.18

Major Shareholders (%)

Teck Loong Foong 58.9Ann Ann Goh 6.5Rowsley Sports 5.2Heng Lam Wai 4.9

Share Performance (%)

Month Absolute Relative1m 1.4 1.13m 9.2 0.76m (14.5) (16.6)12m (29.0) (40.4)

6-month Share Price Performance

0.25

0.27

0.29

0.31

0.33

0.35

0.37

0.39

0.41

0.43

Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12

Expect margins to finally recover, upgrade to BUY

We are upgrading Epicentre from a Neutral to a BUY with a TP of S$0.41,pegged to 12x FY13F earnings. This represents an upside of 32% in addition toa yield of 10-13% based on last closing. Earnings improvement in the comingresults should be a catalyst to stock price. We expect the current Apple maniafad in Asia to spur Apple branded sales. APRs like Epicentre will continue to seesales grow despite the Apple Online Store as Epicentre is able to offer customersbetter bundle deals in terms of extended warranty, discounts on associatedhardware like speakers, keyboards and accessories. FY12 earnings wereaffected by at least S$1m one-off costs associated with:- 1) Expansion in China,2) New M-commerce platform, 3) New CRM programme, and 4) Forex costs.Excluding the one-offs, net margins would have come in at 1.1%. We believe ourFY13/14F net margin forecast of 1.6%/1.9% is conservative (FY12: 0.3%, FY11:2.9%, FY10: 3.8%). The Group has historically offered a dividend payout of 90%and with costs set coming off and earnings starting to kick in, we are confidentmanagement will continue to maintain this generous payout.

No where to go but up. Epicentre was barely profitable in FY12 with net marginhovering at 0.3%. This is a far cry from a high of 3.8% in FY10 and 2.9% inFY11. Going forward, we have remained cautious and forecasted a slightimprovement in net margins to 1.6% and 1.9% for FY13/14F respectively.Earnings are expected to be driven by new Apple branded products and ramp upin sales of new stores. We also note that the Group has decided to put thebrakes on its expansion into China with its current three stores. As at June 2012,the Group has 10 stores in Singapore, five in Malaysia and three in China. Goingforward, we expect 1-2 new stores in Singapore and Malaysia respectively.

Brick and mortar wins online stores. While some investors are concernedover the threat of Apple Online Store eating into Epicentre sales, we do not see a

large impact. Customers generally prefer to purchase from Epicentre as they getto touch and feel the actual product, enjoy bundle discounts which includeextended warranty and accessories deals which are not offered by Apple.

FYE 30 Jun (S$m) FY10 FY11 FY12 FY13F FY14F

Turnover 88.1 162.6 183.9 205.7 229.1Net profit 3.4 4.8 1.0 3.6 4.7% chg YoY 86.1% 40.0% -87.1% 423.6% 33.7%Consensus Na Na Na Na NaEPS (S) 3.6 5.1 0.7 3.4 4.6DPS (S) 1.8 5.0 0.6 3.5 4.5Div Yield (%) 5.1% 14.1% 1.7% 9.7% 12.7%ROE (%) 19.1% 24.1% 3.6% 18.9% 25.2%ROA (%) 12.4% 13.9% 1.6% 7.5% 9.4%P/E (x) 9.5 6.8 52.9 10.4 7.8

P/B (x) 1.9 1.7 2.0 2.0 2.0Source: Company data, DMG Estimates


2/5

See important disclosures at the end of this publication 2DMG Research

FY12 Results Review

Figure 1: FY12 Results Review

FYE Jun (S$m) 2H12 2H11 Chg % FY12 FY11 Chg %

Revenue 91.3 70.5 30% 183.9 162.6 13%

COGS (79.8) (60.1) 33% (160.3) (138.4) 16%

Gross Profit 11.6 10.4 11% 23.6 24.2 -2%

Other operating income 0.6 0.8 -23% 1.8 1.4 34%

Interest income 0.0 - nm 0.0 0.0 -62%

Admin expenses (9.8) (9.1) 8% (18.8) (15.3) 23%

Selling & distribution cost (2.9) (2.2) 29% (5.7) (4.5) 26%

Finance costs (0.0) - nm (0.0) (0.0) 1450%

(Loss)/ Profit be fore tax (0.5) (0.1) 442% 0.9 5.7 -85%

Income tax 0.1 0.1 -51% (0.2) (1.0) -75%

(Loss)/ Profit after tax (0.4) 0.0 -2023% 0.6 4.7 -87%

Minority interest (0.2) (0.0) 1055% (0.4) (0.0) 1770%

PATMI (0.2) 0.0 -557% 1.0 4.8 -79%

Gross profit margin 12.7% 14.7% 12.8% 14.9%

PATMI margin -0.2% 0.1% 0.5% 2.9%

Admin expenses -10.7% -12.9% -10.2% -9.4%Selling expenses -3.1% -3.2% -3.1% -2.8%

Source: Company data

Figure 2: Actual vs Forecast

Sales FY12A FY12F Var %

Singapore 148.0 137.9 7%

Malaysia 33.5 30.5 10%

China 2.4 2.9 -19%

Total Sales 183.9 171.3 7%

Source: Company data and OSK|DMG estimates

Gross margins impacted by forex. We note that the Group suffered about S$3m loss ontheir GP margins from the appreciation of the USD against the SGD. Going forward, Applehas agreed to allow Epicentre make purchases in SGD hence this should iron out the forexissue but Epicentre Malaysia will still continue to make purchases in USD. Malaysiaaccounts for a smaller proportion of Group sales at 18% in FY12 vs 80% for Singapore.

Retail network now at 19 stores. As at June 2012, the Group has a retail network 18stores. This includes five in Malaysia, eight in Singapore and three in China. Out of the threein China, two are located in Shanghai and one in Beijing.

The Group opened a new store in Malaysia in July 2012 at the hip and trendy Bangsar

Village hence it now has six stores in Malaysia. Epicentre has also already gotten Applesapproval for a new store at the upcoming new mall at Jurong Point in Singapore. The mall isslated to open its doors in 1Q 2013. Finally, we note that management has decided to putthe brakes on its China expansion plans, leaving it at three stores.

Why was Singapore down? We note that while revenue for Singapore rose 6% YoY,earnings fell by 79% YoY to S$1.1m. This is due to rising rents and headcount costs as newstores were opened last year which has yet to see sales ramp up to normal levels.Approximately 10% of labour is foreign.

Singapore is also the Groups headquarters hence all the admin costs which includesengaging external consultants to implement customer centric initiatives, implementing a newcustomer retention management (CRM) programme and conducting training programmes

for customers have all been booked as costs to Singapore.


3/5


SHARE PRICE PERFORMANCE

Figure 3: One year Share Price Performance

0.20

0.30

0.40

0.50

0.60

0.70

0.80

4-Jan-11 4-Mar-11 4-May-11 4-Jul-11 4-Sep-11 4-Nov-11 4-Jan-12 4-Mar-12 4-May-12 4-Jul-12 4-Sep-12

Source: Bloomberg

Figure 4: One year P/E trading band at 23x due to lumpy earnings

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

19-Aug-11 19-Oct-11 19-Dec-11 19-Feb-12 19-Apr-12 19-Jun-12 19-Aug-12

Initiated on 6 Jan 2011at S$0.30

Delivered disappointing 2H2011results due to start-up costs inChina

1H2012 results still weak with start

up costs in China.


4/5


FINANCIAL TABLES

Income Statement

FYE 30 Jun (S$m) FY10 FY11F FY12 FY13F FY14F

Revenue 88.1 162.6 183.9 205.7 229.1

COGS (73.8) (138.4) (160.3) (177.9) (198.2)

Gross Profit 14.3 24.2 23.6 27.8 30.9

Other income 1.4 1.4 1.8 2.0 2.0

Distribution & selling exp (2.9) (4.5) (5.7) (6.2) (6.9)

Admin expenses (8.8) (15.4) (18.8) (20.6) (22.7)

Other operating exp - - - 1.0 2.0

EBIT 4.1 5.7 0.9 4.0 5.4

Interest expense - - (0.0) (0.0) (0.0)

Interest income 0.0 - 0.0 - -

PBT 4.1 5.7 0.9 4.0 5.3

Tax (0.7) (1.0) (0.2) (0.8) (1.1)

PAT 3.4 4.7 0.6 3.2 4.3

Minority interests - - 0.4 0.4 0.4

PATMI 3.4 4.8 0.6 3.2 4.3

Balance Sheet

FYE 30 Jun (S$m) FY10 FY11F FY12F FY13F FY14F

Fixed Assets 1.9 2.7 3.8 3.0 3.3

Current Assets 25.4 31.3 35.4 39.4 42.0

Current Liabilities 9.4 14.1 22.1 24.1 26.0

Long-term Liabilities 0.1 0.3 0.4 1.5 2.5

Total Equity 17.8 19.7 16.8 16.8 16.8

Shareholders equity 17.8 19.7 16.9 16.9 16.9

Cash Flow

Net Operating CF 0.4 8.8 1.7 7.4 10.1

Net Investing CF (2.0) (1.6) (2.4) (3.0) (3.0)

Net financing CF 0.6 (1.1) (0.0) (3.2) (4.2)

Net increas e/(decreas e) in cas h (1.5) 5.6 (1.9) 0.4 1.8

Beginning cash 9.9 9.3 14.9 13.0 13.4

Ending cash 8.4 14.9 13.0 13.4 15.2

Growth (%)

Revenue 35.4% 84.6% 13.1% 11.9% 11.4%

EBIT 94.4% 40.2% -84.6% 355.7% 33.4%

PBT 92.0% 39.7% -85.0% 365.4% 33.7%

PAT 86.1% 40.0% -87.1% 423.6% 33.7%

Margins (%)

Gross profit 16.3% 14.9% 12.8% 13.5% 14.0%

EBIT 4.6% 3.5% 0.5% 2.0% 2.3%

PBT 4.7% 3.5% 0.5% 1.9% 2.3%

PAT 3.8% 2.9% 0.3% 1.6% 1.9%

Valuation

P/E (x) 9.8 7.0 54.4 10.4 7.8

P/B (x) 1.9 1.7 2.0 2.0 2.0

ROE (%) 19.1% 24.1% 3.6% 18.9% 25.2%

ROA (%) 12.4% 13.9% 1.6% 7.5% 9.4%

Dividend Yield (%) 5.1% 14.1% 1.7% 9.7% 12.7%

Source: Company data and DMG estimates


5/5


DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage

DISCLAIMERS

This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specificinvestment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluateparticular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation toany securities or investment instruments mentioned in this report.

The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warrantynor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject tochange without notice.

This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities.

DMG & Partners Research Pte Ltd is a wholly owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK InvestmentBank Berhad and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Memberof the Singapore Exchange Securities Trading Limited.

DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in thesecurities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporationswhose securities are covered in the report.

As of the day before 19 September 2012, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd,donot have proprietary positions in the subject companies, except for:

a) Nilb) Nil

As of the day before 19 September 2012, none of the analysts who covered the stock in this report has an interest in the subject companiescovered in this report, except for:

Analyst Companya) Nilb) Nil

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