Karin Technology Hldgs - Ends FY11 with a strong set of results (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.235

Fair Value: S$0.345

Strong set of FY11 results. Karin Technology (Karin) announced a strong set of 2HFY11 results which beat ours and the streets' estimates. Revenue surged 57.3% YoY to HK$1.3b while net profit increased 22.4% YoY to HK$30.2m. For FY11, revenue jumped 38.7% to HK$2.2b, which exceeded our forecasts by 15.1%. Net profit accelerated 52.6% to HK$51.6m. This was boosted by fair value gains on investment properties (HK$6.0m) and derivative instruments (HK$1.3m) as well as forex gains of HK$5.1m, but offset by impairment of trade receivables (HK$8.2m) and write-down of obsolete inventories (HK$3.0m). Excluding forex effects and these exceptional items, we estimate that core earnings would have increased by 87.8% to HK$50.5m. This came in 18.2% above our estimates.

IT infrastructure the key growth driver… Karin's revenue, its highest since its IPO in 2005, was driven largely by a 64.0% surge in sales from its IT Infrastructure segment to HK$1.4b. Contribution to top-line from this segment increased from 55.1% to 65.1%. This strong growth was aided by the distribution of Apple's iPad 2 in Hong Kong and Macau. Notwithstanding the surge in sales volume growth, Karin's gross profit margin declined 1.4 ppt to 7.8% largely due to a change in product mix arising from strong contribution from the iPad 2 which typically carries thinner margins. Nevertheless, this was mitigated by economies of scale as net margin improved to 2.4% (previously 2.2%).

…but initiatives in place to grow other segments as well. While we expect contribution from iPad 2 to continue, we believe management would continue to broaden its products offerings and also focus more intently on the higher margins components distribution segment. This would entail smartphone components and energy saving home appliances which has already started to gain traction.

Consistent and attractive dividends payout. Karin also declared a final dividend of 7 HK cents/share, bringing total declared dividends for FY11 to 12 HK cents/share. This represents a dividend payout ratio of 47.9% and translates into an attractive dividend yield of 7.9%.

Maintain BUY. We bump up our FY12 revenue and earnings estimates by 17.8% and 26.3% respectively, as its results had strongly exceeded our expectations. We also update our HKD/SGD assumptions given the continued weakness of the HKD versus SGD. Our FY13 forecasts are introduced and we roll forward our valuation to 8x FY12F EPS. As such, our fair value estimate increases from S$0.315 to S$0.345. Karin is currently trading at 5.4x FY12F PER and 0.8x FY12F P/NTA, against a projected EPS CAGR of 11.5% from FY11-FY13F. Maintain BUY.