Karin Technology

OCBC on 12 June 2012

We believe that growing macroeconomic headwinds could possibly stifle Karin Technology’s (Karin) Components Distribution segment and enterprise hardware product sales. Nevertheless, we expect this to be mitigated by the group’s new consumer electronics retail business, which offers a full range of Apple products. Karin is likely to be a key beneficiary of Apple’s dominant position in the media tablets space, in our view. We raise our FY12 revenue estimate by 2.9% (FY13 by 2.0%) as we finetune our assumptions for the retail stores contribution but trim our core PATMI forecast marginally by 0.5% (FY13 by 2.8%) to account for higher operating expenses from the running of these stores. Our fair value estimate, which is based on 6x blended FY12/13F core EPS, inches down from S$0.27 to S$0.265. Maintain HOLD as FY12F dividend yield remains attractive at 8.5%.

Macro headwinds have grown in recent months
We believe that increasing macroeconomic headwinds could stifle business sentiment and hence enterprise IT spending. This is likely to have an adverse impact on Karin Technology (Karin). Nevertheless, we are still expecting IT investments to continue in 2012. This is driven by efforts to boost business efficiency and thence competitiveness. Meanwhile, we are expecting Karin’s Components Distribution segment to report a sequential recovery in 2HFY12 as the group experienced a delay in deliveries in 1HFY12. But we are projecting a decline in full-year revenue for this segment due to the weakening macroeconomic situation.

Consumer electronics products pivotal to growth
We opine that there would still be bright spots for Karin despite the current uncertain outlook. This stems largely from Karin’s new retail consumer electronics products stores, which sell a full range of Apple products and accessories in Hong Kong. Research firm Gartner estimated that global sales of media tablets to end users would increase by 98% in 2012. Within this space, Apple is projected to constitute 61.4% of the market share, highlighting its dominant market position. We expect Karin to leverage on this trend to expand its sales volume, although a downside to this would be higher operating costs incurred to run the stores. With the launch of Apple’s next version iPad/iPhone later this year a possibility, we expect Karin to subsequently secure its distribution rights, given its long-standing relationship with Apple. This would correspondingly increase Karin’s revenue growth trajectory, although contribution would only take place in 1HFY13.

Maintain HOLD
We raise our FY12 revenue estimate by 2.9% (FY13 by 2.0%) as we finetune our assumptions for the retail stores contribution but trim our core PATMI forecast marginally by 0.5% (FY13 by 2.8%) on lower net margin assumptions, arising from an increase in our operating expenses forecast. Our fair value estimate, which is based on 6x blended FY12/13F core EPS, inches down from S$0.27 to S$0.265. Maintain HOLD as FY12F dividend yield remains attractive at 8.5%.