KarenSoft: A High Growth Adventure, Smart Investor, December, 2002

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.

Enterprise application typically consists of software-based IT solutions like enterprise resources planning (ERP), supply chain management (SCM) and customer relationship management (CRM) applications. According to Chee, KarenSoft ERP2 is a major enhancement over KarenSoft ERP2000. ERP2 consists of both the elements of ERP and CRM is an all-inclusive e-Biz solution which comprises sales, distribution, materials requirement planning, logistics management planning and production, financial accounting and fixed assets, human resources information and customer relationship management.

In Malaysia, the target market segment of KarenSoft is the small and medium industry (SMI). As the Asian Free Trade Area (AFTA) implementation is just around the corner, all businesses, whether big or small, will be influenced by the effects of globalisation, deregulation and digitisation. AFTA will open global markets and to earn the most from an almost limitless market, the industry needs a proper internal system of handling this new onslaught of business. With the introduction of the e-manufacturing grant as administered by SMIDEC in 2002 Malaysia budget, Malaysian corporations are spending more on enterprise IT solution.

“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. With AFTA around the corner, these manufacturers have no choice but to implement ERP2 in their organisations to remain competitive,” says Chee.

On the uptake for the e-manufacturing grant to implement ERP, KarenSoft recently saw a significant increase in interest from bigger-sized SMIs. The inhibitors are mainly the cost which is mitigated by the 50% e-manufacturing grant and to a lesser extent the RosettaNet Grant, while the driver will clearly be the impact of AFTA. “As regards to economic benefits, with AFTA implementation looming, KarenSoft ERP2 can definitely help SMIs and Tier 2(mid-sized non-SMIs) to compete effectively,” says Chee.

Competition & Trends: Supply

Major enterprise application providers are now offering their customers an integrated suite of software solution. However, this is more prevalent in the high-end market where the adoption rate among large corporations like Petronas, Shell Malaysia, Proton, etc. has been positive due to the need for integration of the various standalone functions with the organisations. On the other hand, smaller and mid-size companies prefer the single functionality implementation approach as it involves lower initial capital investment in purchasing the system.

According to IDC, the enterprise application market is segmented into 3 tiers by taking into consideration the prices of an offered solution, and its target customers in terms of employee size. The Tier-1 market vendors are like SAP, PeopleSoft and JD Edwards and projects are normally worth millions.. Tier-2 is for the mid-market players like IFS, Great Plains, Navision and AccPacc. Tier-3 vendors typically offer off-the-shelf standalone applications like UBS, Quicken and MYOB. Applications in this tier are priced below RM2,500.

All KarenSoft products (including KarenSoftERP2) are positioned in the tier-2 segment of the enterprise application market where the competitors are mainly foreign players such as Microsoft Great Plains and Navision.

On the level of competition, Chee says: “We have recently recorded some big wins again these foreign players. As regards to the SMI/SME market, the level of competition in the segment below RM100k is pretty intense via several smaller local players offering purported ERP solution in the RM50-60k range. As for KarenSoft, we have successfully penetrated the SMI markets where the budget is more than RM100k.” Chee believes some of these companies aim to compete on a global basis and are led by dynamic management teams. He says, “We believe these companies will eventually become the thought leaders that will drive their respective industries.”

By helping these thought leaders achieve breakthrough performance, KarenSoft hopes to attract more conservative SMI/SMEs to be their clients. Chee enthuses, “Make no mistake about it. We’re going to be extremely loyal to our early adopters, and will do whatever we can to help them to stay on the leading edge of their industries.”

On the impact of the budget on KarenSoft, Chee notes that both KarenSoft Corporation Sdn Bhd and KarenSoft Solutions Sdn Bhd are technically SMIs (share capital not exceeding RM2.5m) and will therefore enjoy the benefits of the maximum tax savings of 8 % on the 1st RM100,000. However, he adds: “From the marketing angle, there is no material impact on future sales of our ERP2 products as the maximum tax savings is only RM 8,000. In addition, such savings will only be enjoyed if the SMIs are profitable.”

Valuation & Future Growth

Touching on the company’s performance, Chee reveals that despite the Nasdaq crash as well as the 9/11 incident in FY2001, KarenSoft managed to achieve a 53.8% growth in revenue. As for FY2002, he is aiming for a 100% sales revenue growth over FY2001. He points out that in a recent IDC Overview of the Malaysian software market, KarenSoft was ranked 19th out of the top 30 vendors. There were only three other Malaysian companies in the survey which were all ranked lower than KarenSoft.

At a prospective PER of about 14x, KarenSoft’s IPO is relatively attractive vis-à-vis other MESDAQ stocks which mostly trade at PERs of more than 20x.

Another attraction is that KarenSoft has a unique corporate governance structure where it has 3 independent directors plus a non-independent non-executive director versus only 3 executive directors. Its chairman of audit committee is Mr. Philip Chan, currently vice-president and head of listing for Singapore Stock Exchange.

Much of its growth will also depend on the manufacturing sector and with AFTA and globalisation, Malaysian manufacturers have to “cost down” (i.e. cut operating costs) or be competed out of the market by the economic might of China. Moving forward, demand for deployable knowledge management solutions will accelerate as manual processes are eliminated through the integration and automation of back-end infrastructures. KarenSoft knows its market and could soon be a force to be reckoned with in the IT sector.


by Chen Fun Sing