Highlights

• In its exchange filing, Karex announced that its whollyowned subsidiary, Karex Industries Sdn Bhd (KISB) has entered into an agreement with Tropical Produce Company to acquire two pieces of lands for a total cash consideration of RM14.8m.

• The total land areas measuring approximately 4.5 hectares (~487,545 sq ft) located at Mukim Api-Api, Pontian, Johor.

• The objective of the land purchase is to ensure that the daily operation will face no disruption as Karex embark on its expansion plan.

• KISB has been occupying the land for manufacturing operations and warehousing since February 2004 for an annual rental of approximately RM376,800.

• The proposed acquisition also enables Karex to add new capacity; specifically expansion space to its catheters business (contributes 3% of revenue in FY14).

• The proposed acquisition is expected to be completed in 4QFY15. Financial Impact

• The price tag of RM14.8m which was derived based on willing-buyer willing-seller basis will be entirely funded by cash raised from private placement. We deemed the price is fairly valued. We also not too concern as Karex ended FY14 with net cash position.

Comment

• We are positive on the land acquisition as it gives Karex a better position as a land owner rather than tenant, thereby reducing the risk of non-renewal of the tenancy agreement which will expire in October 2015.

Risks

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

Forecasts

• We factor in the cost of the land acquisition. As a result, EPS for FY15-17 is diluted by 2%.

Rating

HOLD , TP: RM4.61

Positives

• World’s largest condom manufacturer; everincreasing 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

• We raised our TP to RM4.61 as we lift our target P/E from 21x to 23.8x CY16 EPS (2SD above its international peers) in view of positive earnings expectation and expansion plan.

We maintain HOLD recommendation on the equity.

Source: Hong Leong Investment Bank Research - 1 Apr 2015