The business model is simple enough: pull people into one’s
stores by offering Apple products at a slim margin and make one’s money on the
accessories, the after-sales service, and so forth. Not complicated and there
are probably only three ways to muck it up: (1) People no longer like Apple
products; (2) Apple decides to sever its relationship with Epicentre; (3) the
Singapore Dollar takes a nosedive.
The last of these is, for our purposes, the item of interest.
The USD has appreciated against the Singapore dollar. Since Epicentre buys its
Apple-branded inventory in USD, its
gross margins on Apple products have nosedived, turned negative, and made their
effects felt all the way down the income statement. Plunging earnings, plunging
share price.
Epicentre has now negotiated an arrangement with Apple whereby
its Singapore operations (80+% of revenue) may now buy Apple-branded inventory
in Singapore dollars. Its Malaysian operations (<20% of revenue) will
continue to buy in USD.
The upshot is that gross margin should improve by a minimum
of ~3.6% and that the earnings margin should therefore improve to a minimum
~4.0% . A 4% net income margin on SGP $180
million translates into an earnings yield of ~41%. And, since Epicenter pays
out 85%+ of its earnings, it seems reasonable to expect a forward dividend
yield of 35%.
There are some other factors that justify more upside to the
valuation – the announced exit from the loss-making presence in PRC, immature new
stores in Malaysia, investments in “customer-centricity” that have
been expensed – but these are immaterial to the investment case at the current share
price.
The shares are illiquid and any buyers will be competing
with the company itself.
Disclosure: I am long Epicentre and intend on buying more
shares.
