Highlights

• Karex made an announcement on details of the proposed bonus issue, following the earlier announcement made on 26th February 2015 on the same matter.

• It involves the issuance of 222.75m new ordinary shares of RM0.25 on the basis of 1 bonus share for every 2 existing shares held as at 5:00pm on 20th April 2015.

• The bonus shares will be listed and quoted on the Main Market on 21 April 2015.

• Upon completion of the proposal, total shares outstanding will be 668.25m shares. The whole bonus issue will be capitalised from the group’s share premium account

Comment

• We are positive on the news as it will help to improve the stock’s trading liquidity and marketability in the long run.

• This will make Karex’s shares more affordable and enable a wider group of investors to participate in the growth of the company on top of improving the stocks’s liquidity.

• Post deal, our ex-all TP will be adjusted to RM3.26 while based on yesterday’s closing price, ex price will be adjusted to RM3.02.

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

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 maintain our TP at RM4.61 on the back of unchanged target P/E 23.8x CY16 EPS (2SD above its international peers).
• We maintain HOLD recommendation on the equity.

Source: Hong Leong Investment Bank Research - 7 Apr 2015