Karin focus on Apple products

Fair value S$0.250


2HFY12 core earnings below expectations
Karin Technology’s (Karin) 2HFY12 revenue was within our expectations but core PATMI missed. Revenue jumped 35.3% YoY and 12.7% HoH to HK$1,712.9m, while reported PATMI surged 22.0% YoY and 61.3% HoH to HK$36.9m. But after adjusting for forex effects and other exceptional items, we estimate that core PATMI would instead have declined 12.1% YoY and 16.2% HoH to HK$21.4m. For FY12, revenue accelerated by 49.1% to HK$3,232.3m, or 1.8% above our forecast. This growth was driven largely by its Consumer Electronics Products (CEP) segment (now separated from the IT Infrastructure segment for reporting purposes), which entails the selling of the full range of Apple products through Karin’s retail stores. The group also experienced an increase in demand for network security and enterprise software products. Reported PATMI for FY12 grew 15.7% to HK$59.7m. However, we estimate that core PATMI fell 7.2% to HK$46.9m, which was 14.1% below our projections.

Growth in declared dividends for FY12 On a positive note, a final dividend of 7.1 HK cents/share was declared, bringing total FY12 dividends to 14.1 HK cents/share, or a yield of ~8.4%. This is in line with our forecast and compares favourably to FY11’s DPS of
12 HK cents.

Maintain HOLD
Looking ahead, we believe that Karin’s CEP segment would remain as its main revenue driver, given market talk of the launch of Apple’s iPad Mini and iPhone 5, possibly in Sep/Oct this year. We expect Karin to be a key beneficiary of Apple’s dominant position in the tablet and smartphone space, although we believe that margins for its retail stores are relatively lower as compared to its IT Infrastructure segment. Another key area of focus would be on higher margin network security products and solutions which are increasingly deployed in the cloud computing space. We raise our FY13 revenue forecast by 6.9% but lower our core PATMI estimate by 7.6% on lower margin assumptions. Our FY14 projections are also introduced. Maintain HOLD, but with a lower fair value estimate of S$0.25 (previously S$0.265) as we roll forward our valuation to 6x FY13F core EPS.