Results

1Q15 revenue of RM70.1m (+7.2% yoy, +11.1% qoq) was translated into core net profit of RM12.1m (+19.8% yoy, -16.3% qoq), accounting for 18.4% and 19.2% of HLIB and consensus full year estimates, respectively.

We consider this to be in line as we are expecting stronger quarters ahead from:

1. Maiden contribution of ONE ® brand from 2Q 15 onwards; and

2. Margin expansion from inc reas ed sales of better margin products, declining latex prices and strengthening USD.

Deviations

• In line.

Dividends

• None (1Q14: None).

Highlights

1Q15 revenue, which increased by 7.2% yoy and 11.1% qoq, was transformed into PB T that surged by a favourable 31.7% yoy and 20.4% qoq thanks to margin expansion (+4.4ppt yoy, +1.8ppt qoq ). The improvement in margin was derived from the sales of better margin products as well as favourable forex and latex prices. It is worth noticing that margins have been on a rising trend.

Installed production capacity stands at 4.0bn pcs. Utilisation rate in the current quarter is 76.3%. This is slightly higher than the comfortable level of 70- 75% due to the fulfilment of government tenders.

There is a slight delay in the completion of Pontian plant to end of 2015. The delay is due to the inclusion of new polyisoprene lines and some redesigning work on the dipping lines.

Nevertheless, the delay should not be a worry as the planned capacity of 5bn pcs of condoms by 2015 will be covered by an expansion in the plant over in Hat Yai.

Revenue contribution from Africa increased attributable to higher orders from the tender market. Contribution from America moderated as their focus was partly shifted from commercial orders to tenders during the period.

Product mix ratio between condoms, catheters and probe covers & lubricating jelly remains fairly constant at 94:4:2.

Karex foresees good prospect for FY15 as it continues to secure new orders on the back of increasing demand in tandem with population growth and rising awareness.

Risks

• Surge in raw material prices, forex risks, revision on foreign labour policy, successful invention of HIV/AIDS cure, product substitutions for condoms.

Forecasts

• Unchanged.

Rating

BUY , TP: RM3.43

Positives

• World’s largest condom manufacturer; ever increasing global condom demand ; strong in-house R&D; licensed to export to major part of the world; and successful acquisition of Global Protection Corp.

Negatives

• High dependency on foreign labour and lack of long-term contracts with customers.

Valuation

• Reiterate BUY with an unchanged TP of RM3.43, based on P/E multiple of 19x CY15 EPS.
• Our multiple is pegged to the average P/E multiple of its international peers

Source: Hong Leong Investment Bank Research - 1 Dec 2014