Results

• 2QFY15 revenue of RM77.0m (-6.3% yoy, +9.8% qoq) was translated into core net profit of RM11.1m (-2.6% yoy, -8.7% qoq). This took 1HFY15 to RM23.2m (+112.7% yoy), accounting for 35.2% and 36.8% of HLIB and consensus full year estimates, respectively.

Deviations

• Amid favourable USD and raw material prices, Karex has lowered selling price in order to retain existing customers.

Dividends

• None.

Highlights

• 2Q15 revenue declined by 6.3% yoy due to lower selling price for condoms and also high base effect in the same quarter last year as a result of deliveries of tender orders during that period. It is worth noticing that gross margin has improved to 32.7% (2Q14: 29.4%), thanks to favourable currency exchange and raw material prices.

• For the quarter under review, installed production capacity remains at 4.0bn pcs. Utilisation rate for 1HFY15 was 76.4%, slightly higher than the comfortable level of 70-75% due to fulfilment of government tenders.

• Global Protection started its maiden contribution (revenue of RM6.7m) with a PAT of RM320k during the current quarter.

• Expansion plan in Hat Yai is on track in April 2015, which will add 1bn pcs additional capacity. Upon its full commission, it will have a total manufacturing capacity of 2.2bn pcs pa.

• In effort to get closer into the European market, Karex is planning to set up a subsidiary in Spain with local sales team for European market which will be focusing on supermarket chains and private labels.

• Product mix ratio between condoms, catheters and probe covers & lubricating jelly for the current quarter has slightly changed to 90:5:5 from 94:4:2 in the previous quarter.

• In a separate announcement, Karex proposed a private placement of 40.5m shares and expects to raise approximately RM150m, which translate to an indicative price of RM3.70 per share. The proceeds from private placement will be utilised for development and business expansion (circa RM110m), working capital (circa RM36.5m) and the remaining to defray expenses for both proposals.

• Karex also proposed bonus issue of 1 bonus share for every 2 ordinary shares upon completion of the proposed private placement; entitlement date to be determined later.

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 pending company visit later next month.

Rating

HOLD , TP: RM4.00

Positives

• World’s largest condom manufacturer; everincreasingglobal 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 oflong-term contracts with customers.

Valuation

We downgrade the stock to HOLD with unchanged TP of RM4.00, based on P/E multiple of 19x CY15 EPS.

• Our multiple is pegged to the average P/E multiple of its international peers (see Figure #5).

Source: Hong Leong Investment Bank Research - 27 Feb 2015