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Epicentre Holdings: Growth Story Intact Despite Insider Selling

Contributed by Shares Investment

By Jade Lee

There is no question that Epicentre Holdings, Asia’s largest Apple premium reseller, is primed to ride on the wave of Apple products. Formerly known as Afor, Epicentre could see more revenue coming from its Apple products as the prominent brand now is the fifth best selling computer brand in the world, according to a study released by Canalys. Notably, of the 6.4m units worldwide pad shipments in 1Q11, Apple accounted for 74% of these shipments, while other vendors struggled to bring competitive products to market.

Much to the delight of investors, Epicentre also saw its share price more than doubled to a peak of 69 cents from 30 cents, since the beginning of this year. However, the share tumbled 9.7% over a 2-day period to $0.56 on 18 May, after an insider, Lam Wai Heng, sold 1.025 million shares in the open market through a series of transactions. Analyst also noted that there could be a share overhang in the near term, with certain shareholders looking to reduce their holdings, further exerting downward pressure on the stock price.

Not Just An Apple Premium Reseller

Despite the negative sentiments brought about by the insider selling, Epicentre is apparently riding well on the wave of Apple products. Earlier, the company reported that it has achieved its highest-ever half year results with a year on year net profit growth of 158.9% from $1.8m to $4.7m for the period ended 31 Dec-11, owing to a 123.8% jump in revenue as well as higher profit margins in all core markets.

In line with the popularity of iPhone and iPad, Epicentre’s bulk of sales were generated from Apple-branded products, which contributed 90.7% to the total increase. But remarkably, the higher pre-tax profit (PBT) margin actually came from the more lucrative sales of complementary products. This is evident from a thin 4.8% of PBT margin for Apple-branded products while an 18% PBT margin for third party complementary products in FY10.

What is more, the sales of third party and proprietary branded complementary products, such as Bose, Belkin, DLO, Specks, V-moda, and Griffin, are expected to register strong growth in line with new product launches. As such, OSK Securities expects an increase of overall net margin from 3.8% in FY10 to 4.6% in FY11 for Epicentre.

China Remains A Key Market

Given that Epicentre’s first half performance has already surpassed that of FY10, Epicentre is now eyeing for more expansion to maintain its pace of growth. Geographically, 1H11 revenue across all 6 stores in Singapore has jumped 88% to $81.5 million. Meanwhile, revenue from Malaysia’s operations has also soared 116.3% to $10.6 million.

Epicentre’s expansion is certainly on track. Two large Malaysian stores are slated to open by end FY11 and 10 new store openings across Singapore, Malaysia and China are expected by end FY12. Nonetheless, “China remains a key market in our strategic expansion plans,” said Epicentre Chairman and Chief Executive Officer, Jimmy Fong. The firm now owns a 70%-stake in a joint venture with China Global Finance Company, an education industry player, to operate Apple resellers in China.

UOB Kay Hian recommended ‘Buy’ with a target price of $1.01, saying that the store positioning strategy in China enables Epicentre to enter into the highly under-penetrated Apple premium reseller sectors and tap on the massive first-time Apple-user demand there. Notwithstanding, it stressed the store location is the key to success as there is limited scope for differentiation between Apple premium resellers on the basis of product offering and services.

As put by UOB Kay Hian, Epicentre’s monthly sales of iPad 2 could reach 4,000 to 5,000 units with contribution of up to $4 million to the firm’s total revenue. Safely to say, the Apple bandwagon is unlikely to retract anytime soon, but a unifying factor emerged: How far can the Apple wave go? And will the higher margin of third party products be able to offset any unexpected losses from the change in consumer preferences? Well, this could be something worth taking note of.