Investment Merits

• Regional leader in data storage management. Kronologi Asia Berhad (Krono) is primarily involved in providing Enterprise Data Management (EDM) solutions. The portfolio of the products and services rendered by the Group enables its customers to achieve data assurance and protection through systematic backup, storage and recovery of enterprise data to ensure business continuity.

• Driven by digitalized data. The total global data volume is expected to soar from 33 zettabytes (ZB) in 2018 to 175ZB in 2025, with CAGR of 61% (see Figure 1), according to International Data Corporation (IDC). The bright prospects of data, which is deemed as the new gold nowadays, has set Krono in the right pathway in this rapid growing industry. The Group is envisaged to benefit substantially from the rising demand of data. As a specialist in Hybrid Cloud and EDM providers, Krono is poised to further accelerate its growth in which the Group continues to embrace digital transformation in its operation. The Group has recorded a commendable historical earnings growth, CAGR of 30% in its net profit from FY2015 – FY2022 despite temporary blip with a loss incurred in FY2020 due to one-off impairment.

• Eyeing potential of EDM As-a-service (AAS) business…… EDM AAS provides a more complete portfolio of data management solutions to the customers, assisting them to adopt and adapt cloud based service leaning towards the consumption based and subscription-based model in which customers could save more on CAPEX. The management is on track of transforming the Group from current high revenue mix of EDM Infrastructure Technology (EDM IT) into a more EDM AAS sales mix.

• …… To drive sustainable profit growth. EDM AAS is a strategic business move to generate more recurring and sustainable business income stream to the Group’s top line and bottom line. Despite a challenging environment in FY21, Krono registered a 119% YoY growth in revenue in the AAS business segment. Although the segment incurred a loss of RM5.8m due to one-off impairment in PPE of RM11.2m, we are still optimistic on its future growth and project a 50% yoy growth in its bottom line of the segment in FY2023.

• Geographical diversification. The Group has relatively low business concentration risk thanks to its geographical diversified business segment. Krono’s operation has presence in several countries across different subsidiaries in countries such as Singapore, Philippines, Hong Kong & Taiwan, China, India and other Southeast Asia nations.

• Leveraging on demand of cold storage by utilising tape media with high capacity yet low pricing. Cold data refers to the data rarely accessed. The growing of data has spiked the demand of cold data storage as the most of the data are cold data (see Figure 2). Hence, Krono is providing the services to unlock the value in massive cold data sets without expensive fees by using the hardware such as tape media with low pricing and high capacity, thus yielding a better margin.

• Optimistic on the acquisition of Quantum China Limited (QCL) as it will strengthen the Group’s footprint in a largely untapped market in China. EDM industry in China market is expected to grow rapidly from market size of USD26.3b in 2018 to USD87.5b in 2023 with a CAGR of 30%. In FY21, Krono acquired the remaining stake in Quantum China Ltd (QCL). The acquisition rendered a net profit guarantee of approximately RM8m for FY22 and RM10m for FY23. Also, the acquisition enabled the Group to penetrate into one of the largest data markets in the world – China. The large potential market offers Krono plenty of opportunities and we believe Chinese market would be the largest earnings contributor to the Group in the near future.

• Promising outlook with the rising value of AAS and data management solutions in the era of post-pandemic or ‘new normal’. The Covid-19 pandemic has hastened the development of technology and cloud storage solutions as more data stored in the cloud, driven in part by remote work and backup purposes. Thus, this has directly benefited the Group, being the regional data storage providers who grow its cloud business aggressively.

• Gaining tractions in cloud computing. Krono is growing its market share by providing services to 2 of the Top 5 data management Hyperscalers in the world. The Group is building cold data storage and manage unstructured data for the 2 of the top Hyperscalers. Meanwhile, the Group has won several Exa-scale computing design contracts and is firming up definitive agreements with the international Webscalers.

• Strong balance sheet with a net cash position…… The Group boasts a net cash position of approximately RM83m with a current debt ratio of 0.37x.

• …… lending a solid foundation to fund M&A and expand its business. The management is exploring any M&A opportunities which could further expand its market size and footprint. The synergies stemming from any M&A will further strengthen the Group’s product offerings on both EDM IT and EDM AAS via the expertise and network rendered by the merged or acquired entity.

Earnings Outlook

• We project 19% and 8% YoY revenue growth for FY23F and FY24F to RM 367.2m and RM395.9m respectively. Meanwhile, our net earnings forecasts for FY23F and FY24F are stood at respective RM26.3m (+11% yoy) and RM27.7m (+5% yoy) on the back of anticipated flourishing China QCL business and the higher revenue mix of EDM AAS’ recurring income.

Valuation & Recommendation

• We derive a target price of RM0.68 for Krono. Our valuation is pegged at 19x FY23F EPS of 3.6sen. Our target PE assigned is based on its 3- year mean of PER. We advise investors to accumulate the stock on current share price weakness as our fair value of the stock renders 30% upside from current closing of RM0.520.

Risk factors

• Foreign currency exchange (forex) fluctuations.

• Potential EPS dilution due to possible private placement.

• Lack of long-term contracts.

Source: JF Apex Securities Research - 13 Apr 2022