Stable Earnings Growth; Extremely Undervalued
The author is an analyst of NH Investment & Securities. He can be reached at kyeongkeun.kang@nhqv.com. -- Ed.
Due to a recent fire at a data center near Seoul, the need for data center redundancy systems has emerged, a development that should boost demand for Piolink’s network equipment. Also considering its cash holdings, the firm’s shares appear extremely undervalued, trading at a 2023F P/E of 5.6x.
Promotion of data center redundancy law
The establishment of a disaster recovery (DR) system, including data center redundancy, should boost demand for Piolink’s application delivery controller (ADC) equipment. The government hopes to pass the Data Center Redundancy Act this year, which will require value-added telecommunications business providers to run back-up data centers. It also intends to make administrative recommendations to encourage companies to implement measures before the legislation is passed.
Piolink’s ADC equipment facilitates the global server load balancing (GSLB) required for data center redundancy, so that in the event of a computer failure (caused by fire or war, for example), services can be used without interruption via traffic dispersion. We expect the firm’s ADC sales to rise on demand for new data centers as well as existing data centers. ADC sales for this year and next year are forecast at W20.5bn (+18.6% y-y) and W24.5bn (+19.6% y-y), respectively.
Stable earnings growth; extremely undervalued
Security switch sales are also showing sound growth. In particular, cloud switches (TiFront), which are capable of conducting remote control and error analysis, are enjoying strong exports, led by the growth of Japan’s cloud managed network market. With demand stable in the domestic market as well, sales at the security switch division should reach W20.7bn (+23.9% y-y) this year.
We expect Piolink’s earnings to steadily increase thanks to a favorable business environment, including data center DR system establishment and digital transformation acceleration. The stock is trading at a 2023F P/E of only 5.6x, which is extremely undervalued considering the company’s net cash holdings of W43bn in 3Q22.