8 July 2002
ECS Holdings
Recommendation: Buy
Price: S$0.71

Consolidating Control of Subsidiaries

ECSH will be acquiring the remaining stakes of its China (presently 51%) and Thailand (presently 75%) subsidiaries. Total cost of S$34.3m will be paid with 34.36m new ECSH shares (at S$0.70 each) and S$9.8m cash. All new shares issued will be placed under moratorium for 6-12 months. Goodwill of around S$15m will be amortised over 15 years. Both companies will become wholly owned.

We are positive on the acquisitions. It makes sense for ECSH to consolidate subsidiaries' profits since it currently bears all their financial risks. The acquisitions are attractively priced at 4.4-5.7x historical PEs (vs. ECSH's 12x fully-diluted earnings) and will enhance EPS. Furthermore, earnings in both China and Thailand are expected to jump this year. China is enjoying healthy orders in the infrastructure division while Thailand is benefiting from renewed IT spending by the government and finance sector. Our net profit forecast has been raised by S$2.1m to S$24.4m and EPS by 3% to S$0.74, assuming the acquisitions are effective on 1 Jul 02. In line with our new numbers, our price target has risen to S$0.90 (12x PE).

On the negative side, the acquisitions will raise ECSH's net borrowing by S$9.8m to S$115.5m (although gearing drops from 0.9x to 0.8x). This high gearing will constrict the company's ability to fund future growth. Management's target gearing is 0.5x.