September 19, 2012

SINGAPORE EQUITY Investment Research

DMG & Partners Research CONSUMER
Melissa Yeap +65 6232 3897 melissa.yeap@sg.oskgroup.com Terence Wong, CFA +65 6232 3896 terence.wong@sg.oskgroup.com
RETAIL Epicentre is the leading Apple Premium Reseller in Asia. It has a network of 18 stores across Singapore, Malaysia and China Stock Profile/Statistics Bloomberg Ticker STI Issued Share Capital (m) Market Capitalisation (S$m) 52 week H | L Price (S$) Average Volume (000) YTD Returns (%) Net gearing (x) Altman Z-Score ROCE/WACC Beta (x) Book Value/share (S$) Major Shareholders (%) Teck Loong Foong Ann Ann Goh Rowsley Sports Heng Lam Wai 58.9 6.5 5.2 4.9 EPIC SP 3,071 93 33 0.558 0.300 17 -21.1 0.2 7.2 3.5 0.6 0.18

Corporate Update

Private Circulation Only

EPICENTRE

BUY Price Previous Target S$0.355 S$0.310 S$0.410

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 to a yield of 10-13% based on last closing. Earnings improvement in the coming results should be a catalyst to stock price. We expect the current Apple mania fad in Asia to spur Apple branded sales. APRs like Epicentre will continue to see sales grow despite the Apple Online Store as Epicentre is able to offer customers better bundle deals in terms of extended warranty, discounts on associated hardware like speakers, keyboards and accessories. FY12 earnings were affected by at least S$1m one-off costs associated with:- 1) Expansion in China, 2) New M-commerce platform, 3) New CRM programme, and 4) Forex costs. Excluding the one-offs, net margins would have come in at 1.1%. We believe our FY13/14F net margin forecast of 1.6%/1.9% is conservative (FY12: 0.3%, FY11: 2.9%, FY10: 3.8%). The Group has historically offered a dividend payout of 90% and with costs set coming off and earnings starting to kick in, we are confident management will continue to maintain this generous payout. No where to go but up. Epicentre was barely profitable in FY12 with net margin hovering at 0.3%. This is a far cry from a high of 3.8% in FY10 and 2.9% in FY11. Going forward, we have remained cautious and forecasted a slight improvement in net margins to 1.6% and 1.9% for FY13/14F respectively. Earnings are expected to be driven by new Apple branded products and ramp up in sales of new stores. We also note that the Group has decided to put the brakes on its expansion into China with its current three stores. As at June 2012, the Group has 10 stores in Singapore, five in Malaysia and three in China. Going forward, we expect 1-2 new stores in Singapore and Malaysia respectively. Brick and mortar wins online stores. While some investors are concerned over the threat of Apple Online Store eating into Epicentre sales, we do not see a large impact. Customers generally prefer to purchase from Epicentre as they get to touch and feel the actual product, enjoy bundle discounts which include extended warranty and accessories deals which are not offered by Apple.
FYE 30 Jun (S$m) Turnover Net profit % chg YoY Consensus EPS (S) DPS (S) Div Yield (%) ROE (%) ROA (%) P/E (x) P/B (x)
Source: Company data, DMG Estimates

Share Performance (%) Month 1m 3m 6m 12m Absolute 1.4 9.2 (14.5) (29.0) Relative 1.1 0.7 (16.6) (40.4)

6-month Share Price Performance

0.43 0.41 0.39 0.37 0.35 0.33 0.31 0.29 0.27 0.25 Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

FY10 88.1 3.4 86.1% Na 3.6 1.8 5.1% 19.1% 12.4% 9.5 1.9

FY11 162.6 4.8 40.0% Na 5.1 5.0 14.1% 24.1% 13.9% 6.8 1.7

FY12 183.9 1.0 -87.1% Na 0.7 0.6 1.7% 3.6% 1.6% 52.9 2.0

FY13F 205.7 3.6 423.6% Na 3.4 3.5 9.7% 18.9% 7.5% 10.4 2.0

FY14F 229.1 4.7 33.7% Na 4.6 4.5 12.7% 25.2% 9.4% 7.8 2.0

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DMG & Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report. Please refer to important disclosures at the end of this publication. OSK Research
See important disclosures at the end of this publication See important disclosures at the end of this publication DMG OSK Research 1

FY12 Results Review Figure 1: FY12 Results Review

FYE Jun (S$m) Revenue COGS Gross Profit Other operating income Interest income Admin expenses Selling & distribution cost Finance costs (Loss)/ Profit before tax Income tax (Loss)/ Profit after tax Minority interest PATMI Gross profit margin PATMI margin Admin expenses Selling expenses 2H12 91.3 (79.8) 11.6 0.6 0.0 (9.8) (2.9) (0.0) (0.5) 0.1 (0.4) (0.2) (0.2) 12.7% -0.2% -10.7% -3.1% 2H11 70.5 (60.1) 10.4 0.8 (9.1) (2.2) (0.1) 0.1 0.0 (0.0) 0.0 14.7% 0.1% -12.9% -3.2% Chg % 30% 33% 11% -23% nm 8% 29% nm 442% -51% -2023% 1055% -557% FY12 183.9 (160.3) 23.6 1.8 0.0 (18.8) (5.7) (0.0) 0.9 (0.2) 0.6 (0.4) 1.0 12.8% 0.5% -10.2% -3.1% FY11 162.6 (138.4) 24.2 1.4 0.0 (15.3) (4.5) (0.0) 5.7 (1.0) 4.7 (0.0) 4.8 14.9% 2.9% -9.4% -2.8% Chg % 13% 16% -2% 34% -62% 23% 26% 1450% -85% -75% -87% 1770% -79%

Source: Company data

Figure 2: Actual vs Forecast

Sales Singapore Malaysia China Total Sales FY12A 148.0 33.5 2.4 183.9 FY12F 137.9 30.5 2.9 171.3 Var % 7% 10% -19% 7%

Source: Company data and OSK|DMG estimates

Gross margins impacted by forex. We note that the Group suffered about S$3m loss on their GP margins from the appreciation of the USD against the SGD. Going forward, Apple has agreed to allow Epicentre make purchases in SGD hence this should iron out the forex issue but Epicentre Malaysia will still continue to make purchases in USD. Malaysia accounts 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 18 stores. This includes five in Malaysia, eight in Singapore and three in China. Out of the three in 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 Apples approval for a new store at the upcoming new mall at Jurong Point in Singapore. The mall is slated to open its doors in 1Q 2013. Finally, we note that management has decided to put the 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 new stores 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 includes engaging external consultants to implement customer centric initiatives, implementing a new customer retention management (CRM) programme and conducting training programmes for customers have all been booked as costs to Singapore.

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SHARE PRICE PERFORMANCE Figure 3: One year Share Price Performance

0.80

Initiated on 6 Jan 2011 at S$0.30

Delivered disappointing 2H2011 results due to start-up costs in China

0.70

0.60

1H2012 results still weak with start up costs in China.

0.50

0.40

0.30

0.20 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
40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 19-Aug-11

19-Oct-11

19-Dec-11

19-Feb-12

19-Apr-12

19-Jun-12

19-Aug-12

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FINANCIAL TABLES
Income Statement FYE 30 Jun (S$m) Revenue COGS Gross Profit Other income Distribution & selling exp Admin expenses Other operating exp EBIT Interest expense Interest income PBT Tax PAT Minority interests PATMI Balance Sheet FYE 30 Jun (S$m) Fixed Assets Current Assets Current Liabilities Long-term Liabilities Total Equity Shareholders equity Cash Flow Net Operating CF Net Investing CF Net financing CF Net increase/(decrease) in cash Beginning cash Ending cash Growth (%) Revenue EBIT PBT PAT Margins (%) Gross profit EBIT PBT PAT Valuation P/E (x) P/B (x) ROE (%) ROA (%) Dividend Yield (%)

FY10 88.1 (73.8) 14.3 1.4 (2.9) (8.8) 4.1 0.0 4.1 (0.7) 3.4 3.4

FY11F 162.6 (138.4) 24.2 1.4 (4.5) (15.4) 5.7 5.7 (1.0) 4.7 4.8

FY12 183.9 (160.3) 23.6 1.8 (5.7) (18.8) 0.9 (0.0) 0.0 0.9 (0.2) 0.6 0.4 0.6

FY13F 205.7 (177.9) 27.8 2.0 (6.2) (20.6) 1.0 4.0 (0.0) 4.0 (0.8) 3.2 0.4 3.2

FY14F 229.1 (198.2) 30.9 2.0 (6.9) (22.7) 2.0 5.4 (0.0) 5.3 (1.1) 4.3 0.4 4.3

FY10 1.9 25.4 9.4 0.1 17.8 17.8

FY11F 2.7 31.3 14.1 0.3 19.7 19.7

FY12F 3.8 35.4 22.1 0.4 16.8 16.9

FY13F 3.0 39.4 24.1 1.5 16.8 16.9

FY14F 3.3 42.0 26.0 2.5 16.8 16.9

0.4 (2.0) 0.6 (1.5) 9.9 8.4

8.8 (1.6) (1.1) 5.6 9.3 14.9

1.7 (2.4) (0.0) (1.9) 14.9 13.0

7.4 (3.0) (3.2) 0.4 13.0 13.4

10.1 (3.0) (4.2) 1.8 13.4 15.2

35.4% 94.4% 92.0% 86.1%

84.6% 40.2% 39.7% 40.0%

13.1% -84.6% -85.0% -87.1%

11.9% 355.7% 365.4% 423.6%

11.4% 33.4% 33.7% 33.7%

16.3% 4.6% 4.7% 3.8%

14.9% 3.5% 3.5% 2.9%

12.8% 0.5% 0.5% 0.3%

13.5% 2.0% 1.9% 1.6%

14.0% 2.3% 2.3% 1.9%

9.8 1.9 19.1% 12.4% 5.1%

7.0 1.7 24.1% 13.9% 14.1%

54.4 2.0 3.6% 1.6% 1.7%

10.4 2.0 18.9% 7.5% 9.7%

7.8 2.0 25.2% 9.4% 12.7%

Source: Company data and DMG estimates

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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 specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any 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 warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change 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 Investment Bank Berhad and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of 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 the securities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporations whose 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, do not have proprietary positions in the subject companies, except for: a) Nil b) 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 companies covered in this report, except for: Analyst Company a) Nil b) Nil DMG & Partners Research Pte. Ltd. (Reg. No. 200808705N) Kuala Lumpur
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