KarenSoft: A High Growth Adventure Smart Investor, December, 2002 KarenSoft Technology Bhd, to be listed on the KLSE MESDAQ, is positioning itself to be a regional player in the enterprise IT solution industry. In an interview with Smart Investor, its CEO discusses the future prospects of the enterprise application software industry and KarenSoft’s ambitions after the listing. KarenSoft Technology (KarenSoft), the new MESDAQ listing, is positioning itself to be a regional player in the enterprise IT solution industry. While not yet a household name, KarenSoft is transforming itself to be Malaysia’s home-grown brand in the enterprise application software sector. For investors who wish to have exposure in the software IT sector, there are not many choices on the KLSE. KarenSoft may be a good bet as it is one of a handful of MESDAQ stocks that are profitable. But there are three elements investors need to know in investing in IT: (1) the growth potential of KarenSoft and the industry; (2) the competition that it faces, both domestically and globally; and (3) the valuations of KarenSoft vis-à-vis MESDAQ stocks, which are normally at a premium to main board stocks. In the interview with Chee Chong Hwa, KarenSoft’s dynamic 45-year old CEO, Smart Investor managed to get a good insight into the potential of the business. While the growth in profits this year is staggering and the profit margins are above average, the prospective Price Earnings Ratio of above 20x at the IPO price of 61 sen reflects management’s expectations of high growth. Chee remarks, “We have been aiming for a MESDAQ listing since the launch of MESDAQ in 1997. However, we were deemed to be too small then in terms of size and valuation. The plan then was to list as a MESDAQ company to raise at least RM10m. Five years down the road, we are seeking to raise RM10.55m via an issue of 17.3m new shares of 10 sen par at an IPO price of 61 sen per share. The prospectus is targeted for 17th October and the listing will be taking place about six weeks after that." On how he views the timing of KarenSoft’s listing during the current global slump in IT stocks, Chee says it is as good a time after preparing a listing for 5 years. The listing will provide funds for expansion of the Certified KarenSoft Solutions Providers (CKSP), who are either external system integrators or mid-sized accounting firms. CKSPs are licensed to market, sell and implement KarenSoftERP2. As a local software solutions provider, KarenSoft has the advantage over its international competitors (Microsoft’s Great Plains and Navision) in that it has local access to Malaysian clients. Being a medium-size niche player, it does not clash head-on with its bigger players such as SAP. However, like most software suppliers, KarenSoft needs to develop a wide distribution network, which is why it relies on external CKSPs to expand its market share. Chee says: “In the earlier days before the entry of MSC Venture Corporation Sdn Bhd in April 2001 and to a lesser extent, the entry of a business angel in 1999, we basically did not have the budget to do branding. As such, we had to rely on doing a good job in order to get references for the next. On the downside, it meant that we used to have a much lower profile on the ERP market. On the upside, this strategy led to a 100 % success rate in ERP implementation.” He points out the company’s mission statement: “We aim to provide services which will exceed our customers expectations." It started its operations with only 2 staff in 1991 but now it employs more than 50 staff, 80% of which are technically oriented. With funding on April 2000, KarenSoft Institute of Technology was set up to train users, trainers and business partners (CKSPs). As at today, there are 12 CKSPs mainly located in areas where KarenSoft Regional Offices are not present such as Kedah, Perak, Kelantan, Malacca, Federal Territory, Selangor, Johor and Sabah. “In order for local manufacturer to sustain their competitiveness against China, cost competitiveness will not be the main factor. Customers are looking for value added in the supply chain. The implementation of ERP2 could create a new competitiveness for the manufacturer themselves.” Chee Chong Hwa Indeed, KarenSoft’s profitability has turned up dramatically: sales for the first half of this year matches the full year sales of RM2m as at Dec 2001 (2000: RM1.3m). At half time, KarenSof earned a net profit of RM600,000 plus. This suggests a net profit margin of more than 30%. Assuming that KarenSoft makes a net profit of RM1.2m in 2002, its Return on Equity will be a healthy 18%. As at 30 June 2002, KarenSoft shareholders’ funds amounted to RM6.6m with a paid-up share capital of RM3.9m. Institutional investors include MSC Venture One Sdn. Bhd. On the prospect of overseas expansion, Chee is enthusiastic, saying: “Since 2001, we have visited China, Philippines, Myanmar and the Czech Republic. Except for China, our visits were as Business Delegates of the official MSC delegation to Philippines, Myanmar and the Czech Republic.” He is especially keen to see the CKSP program expand in China, the ASEAN region, middle east, central and eastern Europe via the Czech Republic. KarenSoft is also among the solutions providers approved by Small and Medium Industries Development Corporation (SMIDEC) to provide support and solutions expertise to SMIs in Malaysia. SMIs may apply for SMIDEC grants to prchase KarenSoft solutions under the e-manufacturing grant introduced in the 2002 Malaysian budget. Growth Potential: Demand According to an IDC report, the enterprise application market in Malaysia is worth RM473.5m in 2001. This market is expected to sustain revenue growth of 9.9% in the next five years, resulting in total enterprise applications sector revenue of RM691.6m in 2005. next