Karin Technology (Karin) reported 1HFY12 revenue of HK$1,519.4m (+68.6%) which topped our forecasts; but estimated core earnings of HK$25.5m (-2.6%) missed our expectations. This was due largely to lower-than-expected gross margin and higher effective tax rate. Top-line and core PATMI met 61.2% and 44.4% of our full-year projections, respectively. Karin’s strong revenue growth was driven by a 131.8% surge in its IT Infrastructure segment, which more than buffered declines in its Components Distribution and ICAD segments. A dividend of 7 HK cents (inclusive of a 3.5 HK cent special dividend) was declared, versus 5 HK cents in 1HFY11. Looking ahead, we opine that Karin’s new IT retail store operations could be its next leg of growth. We pare our core PATMI forecasts and obtain a new fair value estimate of S$0.27 (S$0.28 previously) after rolling forward our valuation to 6x blended FY12/13F core EPS. Downgrade to HOLD.
1HFY12 core earnings below expectations.
Karin Technology (Karin) reported 1HFY12 revenue which topped our estimates; but core earnings missed our expectations due largely to lower-than-expected gross margin and higher effective tax rate. Top-line jumped 68.6% and 20.0% HoH to HK$1,519.4m, meeting 61.2% of our full-year projections. Gross margin of 5.9% represented a 3.6ppt YoY and 0.8ppt HoH drop, due largely to a change in product mix and intense competition from various components and enterprise hardware products. Reported PATMI rose 6.8% YoY but declined 24.4% HoH to HK$22.8m. Adjusting for forex effects and exceptional items, we estimate that core PATMI would instead have slipped 2.6% YoY but increased 4.9% HoH to HK$25.5m, or 44.4% of our FY12 forecasts. A dividend of 7 HK cents (inclusive of a 3.5 HK cent special dividend) was declared, versus 5 HK cents in 1HFY11.
IT Infrastructure the main revenue driver.
Karin’s strong revenue growth was driven by a 131.8% YoY surge in its IT Infrastructure segment, thanks to healthy demand for network security products, iPads and enterprise software. This more than buffered the 13.3% and 14.8% YoY fall in its Components Distribution and ICAD segments, respectively. The former was due to a delay in deliveries, but conditions are expected to pickup in 2HFY12. Karin also started operating three IT retail stores since Dec 2011, selling a full range of Apple products. We opine that this could be Karin’s new growth driver, as it stands to benefit strongly from Apple’s market leadership position in the consumer electronics field.
Stock has performed well; limited potential returns ahead.
We pare our FY12-FY13F core PATMI forecasts by 4.5%-7%, on lower margin assumptions, although we expect sequential improvement in its 2HFY12 results. Rolling forward our valuation to 6x blended FY12/13F core EPS, we obtain a new fair value estimate of S$0.27 (S$0.28 previously). Since we upgraded Karin to a Buy on 10 Jan 2012, its share price has outperformed the broader market and FTSE ST Tech Index by 6.4ppt and 11.6ppt, respectively. We now see limited potential total returns at current levels. Downgrade to HOLD.
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