Maintain BUY
Previous Rating: BUY
Current Price: S$0.22
Fair Value: S$0.315
Poised for double-digit growth. We believe that Karin Technology (Karin) could be poised for double-digit growth in both its top and bottom-line for FY11, having already performed strongly in 1H11. This is due to the still encouraging operating environment which Karin operates in, although the increasing uncertainty stemming from the tepid U.S. economic growth and EU sovereign debt crisis could dampen its growth prospects. Industry watcher Gartner has forecasted worldwide enterprise software revenue to increase by 9.5% to ~US$267b in 2011, followed by a subsequent 7.9% growth in 2012. In addition, Gartner also recently revised up its overall IT spending forecast growth from 5.1% to 5.6% for 2011 and marginally from 4.4% to 4.5% in 2012. Hence, we believe that Karin would be a key beneficiary of these growth trends.
Distributorship agreements to aid earnings momentum. Since the start of FY11, Karin has secured distributorship arrangements from no less than seven vendors, which include McAfee, HP and Imation. We like management's continuous efforts to improve its product offerings via partnerships with global information technology vendors. Previously in our 4 Apr report, we had highlighted that Karin could benefit positively from the sales of IBM hardware and services and Oracle applications to customers via its subsidiaries Karltec Information System and Karga. Since then, we note that IBM reported an encouraging 7.7% and 10.1% growth in revenue and net profit to US$24.6b and US$2.9b respectively for its 1Q11 results, driven by a jump in software, hardware and services sales. It also gave a stronger outlook ahead by raising its operating earnings guidance. Moving forward, we believe Karin could further leverage on its relationships with its vendors by negotiating on the possibility of distributing a wider range of their products and services.
Maintain BUY. We continue to like Karin for its diversified product and service offerings and increasing emphasis placed on 'green' technology. Prospective dividend yield remains attractive at 8.7%, which could lend some level of support to its current share price. Moreover Karin is trading at a P/B of 0.8x and forward PER of 5.7x (below its historical mean PER of 6.2x and its peers' average 7.4x PER), which is undemanding in our view. Reiterate BUY and fair value estimate of S$0.315, still based on 8x blended FY11/FY12F EPS. Key risks to our target price include a worse-than-expected global economic recovery, liquidity risks and inflationary pressures in PRC and Hong Kong.
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