Karex plans to expand capacity to seven billion in FY17

by **Cals** Wed 18 Mar 2015, 01:33

Karex plans to expand capacity to seven billion in FY17
By RHB Research / RHB Research | March 17, 2015 : 10:04 AM MYT

Karex Bhd ([You must be registered and logged in to see this image.] Financial Dashboard)
(March 16, RM4.18)
Maintain buy with an unchanged target price (TP) of RM4.13. Karex Bhd plans to increase its production capacity to seven billion from four billion pieces over the next three years while growing its own brand manufacturing (OBM) business segment to 20% from 4% of total revenue in five years.
Thus a longer-term analysis is required to fully capture the resulting value from this strategy; we change our valuation approach on Karex to discounted cash flow (DCF) from price-earnings ratio (PER).
Already the world’s largest condom producer with a current manufacturing capacity of four billion pieces, Karex plans to expand its capacity by one billion pieces per year and reach seven billion in financial year 2017 (FY17).
Also over the next five years it plans to grow its OBM business from 4% to 20% of total revenue, building on the One condom, the flagship brand of its acquired subsidiary, Global Protection Corp. Through this acquisition Karex intends to diversify its markets and more importantly, increase its operating margin through cost synergies between its original equipment manufacturer (OEM) and OBM operations.
Based on estimates of industry experts, global demand of condoms is expected to grow at a five-year compound annual growth rate (CAGR) of 7.1%, supported by robust growth in the tender market and a low average per capita use, versus a five-year CAGR of 4.2% for supply.
In a recent private placement for 40.5 million shares, the company raised RM158 million.
Further, Karex announced a one-for-two bonus issue with an entitlement date that has yet to be determined.
We upgrade our earnings forecasts by 1% to 10% for FY15 to FY17. Key risks that might affect our forecasts include delays in capacity expansion and a weaker US dollar versus the ringgit exchange rate.
To better quantify the long-term expansionary strategy of Karex we switched our valuation analysis from a one-year forward PER to DCF. We use conservative assumptions, specifically for its timing of capacity increases, average selling price and costs. — RHB Research, March 16
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This article first appeared in The Edge Financial Daily, on March 17, 2015.