Highlights

• Acquiring Medical -Latex (Dua) Sdn Bhd (MLD) from Beiersdorf Aktiengesellschaft, a German company (listed in Frankfurt Stock Exchange) for RM13m to be satisfied by proceeds raised from private placement.

• MLD currently manufactures condom for Beiersdorf’s brand (DUO and HARMONY) for the European and Latin American markets, as well as in-house brand such as ESP – which is currently available in convenient store in Singapore.

• MLD will be an exclusive supplier of all condoms for Beiersdorf for 5-year renewal basis effective from its completion date – which is expected by early October 2015.

• Karex has been granted with fi rst right of refusal to acquire DUO and HARMONY brand should Beiersdorf wish to dispose them in the future.

Comments

• We are positive on the acquisition as it will help to boost Karex FY16 and FY17 EPS by 3% and 5% respectively, assuming contributions from additional 465m pcs condom kick-in November 2015.

• We understand that MLD is currently under -utilizing the assets as it only occupies 30% of its land size while utilization rate for the plant is currently only 41%. We think that this would provide more room for Karex’s future expansion. We were guided by management that they already planned to install another 3 production lines at MLD, which will add the capacity to another 300m pcs condom from existing 165m pcs condom.

• For cost-cutting measures, management shared that they will be abl e to reduce MLD’s l atex and packaging cost by 10% as soon as they start to take over the business.

• We believe this acquisition will help Karex to mitigate bottleneck issue arising as a result of its full order book. Note that Karex already won a tender to supply 1bn pcs of condom to Africa for the next 3 years, starting October 2015.

• Post-acquisition, revenue contribution from European region is expected to increase from circa 7% to about 14%.

• After paying RM13m acquisition cost, Karex will still have circa RM140m proceeds from private placement to be used for business development and expansion.

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: RM3.09

Positives

• Worl d’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

• We maintain our HOLD recommendation and our TP remain unchanged at RM3.09.
• Our valuation is pegged to unchanged P/E multiple of 23.8x of CY16 EPS, based on 2SD above its international peers.

Source: Hong Leong Investment Bank Research - 13 Aug 2015