BBMB Securities report with fairly valued at IPO Price of 61 Sen

BACKGROUND

The group is a Tier-2 total software solution provider which was founded back in 1991 by Mr Chee Chong Hwa, who currently holds 47% shareholdings in the group. It specializes in providing Enterprise Resource Planning(ERP) software solutions to the industrial and commercial sectors, namely in the manufacturing, hospitality and healthcare industries.

With a head office located in Prai and branch offices in Penang and Petaling Jaya, the group has a total 61 full time employees, with most of them (41 people) are in the R&D/Engineering and Technical Staffs/Programmers, while the remaining are marketing and administrative staff.

It has 2 wholly-owned subsidiaries namely (i) KarenSoft Corporation Sdn. Bhd. (KSC) which is a computer software developer and (ii) KarenSoft Solutions Sdn. Bhd. (KSS) which is the marketing arm, maintenance service provider and also provide consultancy services.

Most of the group's sales which amounted to 85% come from the sales of its KarenSoft ERP2 (KERP2), which is its flagship software product. Designed for the manufacturing sector, KERP2 is web-enabled client/server software solution which includes various important modules like the procurement logistics management, human resources, customer relationship management, marketing and business decision support. The remaining 15% of the group's sales comes from its hotel management system and consultancy services.

Major customers...

As mentioned earlier, most of the group's major customers are in the manufacturing and hospitality sector. Naming a few of its Top 10 customers are (i) Malayan Cement Group, (ii) Denko-HLB Sdn. Bhd., Automotive Battery Industries Sdn. Bhd., Shangri-la, Sheraton and Berjaya Group Hotels chain locally.

Research & Development...

In the past 5-years, the group has spent approximately RM1.0m per annum on R&D expenditure, of which activities amongst others include studying and evaluating competitors' products and engineering/technical aspects of the products to be launched by the group.

Future Plans and Strategies...

In its 5-year Business Development Plan, the group will be embarking on overseas expansion while at the same time to expand its Certified KarenSoft Solution Provider (CSKP) outlets. Currently, there are 12 CSKPs locally and the group is planning for an expand its CSKPs into ASEAN, Asia Pacific, Eastern and Central Europe and the Middle East countries within the nest 5-years.

On product development, the group will continue to upgrade its flagship product, enabling it to utilise the latest platform. With LINUX is expected to be widely used in the future, the group has plans to port its KERP into LINUX by this year.

It also plans to penetrate into the SMI market segments, a'diversification from its current focused market segment, whom are mainly the SMEs and some selective higher-end marketplace. Amongst the Tier-2 software solution providers locally, the group is the only Malaysian-based company which provides the whole range of ERP solution and applications to its customers. Its competitors within the grouping are companies like Baan, InterBiz which are mainly foreign-based companies.



FINANCIAL

Private sector focused...

The group's revenue growth has been favourable, especially within the period between FY99 until FY01, with an average growth rate per annum of around 51%. Strong growth in revenue was mainly due to the maintenance portion of its business, which is recurring in nature. Meanwhile on the EBITDA level, there has been inconsistencles with losses were incurred in FY99 and FY2001. Whilst the losses incurred in FY99 were mainly due to the higher interest expenses and operating costs, the losses incurred for FY2001 was due to the higher costs, coming from the increased in headcount to cater the improving demand for its ERP solutions.

Proceeds from the listing exercise...

With the expected RM10.6m proceeds from the listing exercise, the group will be utilising them in the following manner, within 24-months period from its listing date:



OUTLOOK

More demand for ERP solution...

It is expected that the general growth in demand the Enterprise Related software solution will improve in the coming years, with a billing projection at RM399m in 2005, on a CAGR of 9.4% per annum. This is part of the expected spending by these SMEs which is expected to grow on a CAGR of 14.4% until 2006. SMEs commanded approximately 35% of the entire local IT market. This bodes well for the group's future earnings growth.

With expansion, cost of sales might be higher...

Although there would be a continuation in terms of the group's future expansion, we expect it to be part of the main costs, thus eating up their operating margins. This would be a concern as upgrading of its current applications might take up some amount of expenses, thus further erosions on its bottomline could be expected.

Lower effective tax rate, would buffer bottomline...

However, as the group is a MSC status company and a possible user of RosettaNet, which the group is expected to fully utilise by end of the year, KarenSoft will benefit from the tax allowances. Currently, as at 1HFY02, the group's effective tax rate stood at 13% which we believe would be further reduced in the coming years.



VALUATION

Amongst the listed MESDAQ-based companies, the group's closest rival would be Intelligent Edge, which is also in the development of software to be used in management system across the business spectrum. Nevertheless, KarenSoft will the leading listed MESDAQ-based group which is involved in the ERP-based products, thus deserve a premium in terms of valuation.

As there has been no available benchmark locally to value the ERP solution provider, we found that at the IPO price of 61sen, KarenSoft is fairly valued.

Please note that the information offered above is an independent evaluation from BBMB Securities Sdn Bhd. For further information, please contact BBMB Securities Sdn Bhd. KarenSoft Technology Berhad will not be held liable for any consequences arising from the use of this information.