4 July 2002
Aspnetcentre
Recommendation: Subscribe
Price: S$0.20

A New Growth Chapter

Formed in 1989 as an IT training provider, aspnetcentre has evolved into a one-stop IT services company specialising in ERP/SCM installations, outsourcing, IT risk management and IT infrastructure. It operates in Singapore and China with a team of 118 people. We are initiating coverage with a SUBSCRIBE recommendation.

High value-added model. With gross margins as high as 55%, the company boasts one of the highest margins in our IT-services universe. Bellwether Datacraft's margins are 21%. We believe aspnetcentre's higher margins stem from the high degree of customisation required for its software solutions and the smaller number of competitors.

Margins expected to rebound. Last year's emphasis was on topline growth to maintain market share and employee utilisation rates. As a result, there was a higher than usual number of hardware-based projects. Margins will recover this year on the back of 2 factors. First, software system integration is expected to account for a larger proportion of business. Gross margins in this segment are typically 5-6x higher than hardware. Second, operation costs will drop as the company outsources software development work to its Indian software partner, Melstar.

China identified as the next pillar of growth. The company has undertaken several strategic initiatives to enter the Chinese market, including securing the sales rights of Movex software in China and tie-ups with local partners. It has made headway on several proposals and we expect it to clinch some projects this year.

Following a tough 2001, the company is poised for a strong rebound in the next 2 years. Our price target is 30¢, pegged to the industry's 14x FY02 PE (ex-Datacraft).