Karex to launch its own brand of condom in Malaysia next month

by **Cals** Mon 02 Nov 2015, 19:01

Karex to launch its own brand of condom in Malaysia next month

By RHB Research Institute / The Edge Financial Daily | November 2, 2015 : 9:57 AM MYT

This article first appeared in The Edge Financial Daily, on November 2, 2015.

[size=16]Karex Bhd ([You must be registered and logged in to see this image.] Valuation: N/A, Fundamental: N/A)
(Oct 30, RM3.50)
Maintain buy with a higher target price (TP) of RM4.08: We came away feeling more optimistic about Karex Bhd’s prospects after our recent company visit. We reiterate our “buy” recommendation and revise our TP to RM4.08 (from RM3.58, 19% upside). In particular, we expect better first quarter ended Sept 30 (1QFY16) earnings to be 18% to 21% higher quarter-on-quarter (q-o-q) on the back of better-than-anticipated operating efficiency improvements, favourable product mix and a stronger US dollar. We believe that the increased operating efficiency was primarily led by Karex’s automation drive and the realisation of greater cost scales.

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The company also guided for a more favourable product mix resulting in improved margins, citing examples of tender orders with preference for less plain vanilla condoms (eg, more coloured condoms). The US dollar has also appreciated by 10.9% q-o-q against the ringgit.

Recall that Karex retains the prerogative on any forex savings as it does not have any obligation to share the benefits with its clients. We forecast that net margins would improve to 25.2% for the quarter (4QFY15: 22%) and earnings to come in around RM20 million to RM21 million.

We also understand that the turnaround of recently acquired Medical Latex Dua Sdn Bhd (MLD) is likely to be faster than anticipated. While initially guiding to break even within 12 months, management is now confident of a turnaround within three months after bringing down costs. This was with the centralisation of raw material purchases and increasing operational utilisation to 70%.

At acquisition, MLD had 40% utilisation. Karex is also to launch the ONE condom in Malaysia in December, marking the expansion of its own brand manufacturer ambitions in the Asia-Pacific region.

We update our financial year ending June 30, 2016 (FY16), FY17 and FY18 US dollar forex assumptions to 4.27/4.30/4.27 respectively. Coupled with Karex’s latest margins experience, we upgrade our FY16 to FY18 earnings forecast by 11% to 14%. — RHB Research Institute ([You must be registered and logged in to see this image.] Valuation: 1.65, Fundamental: 1.40), Oct 30
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