Highlights

• We attended FY15 briefing and came back feeling positive on its full year performance as well as its intact expansion plan going forward.

• Karex’s effort in focusing on OBM segment (which has higher profit margin) has becoming fruit ful, as EBITDA margin has improved sequentially. Contribution from OBM segment for FY15 stood at 7% vs. 4% for the past two years (Figure #1).

• Despite missing their target to launch “One” brand in 1H15, we were assured that it will be available on local retail stores by end of October. With the confl uenc e of “One” brand and potential first right of refusal on “DUO” as well as “HA RMONY”, we think that OBM segment will continue to grow in near term.

• Demographically, Asia and Africa remained as key regions (Figure #2) and we had in our report dated 13th August mentioned that Karex already won tender to supply 1.1bn pcs of condom to Africa for the next three years, starting October 2015.

• Utilization rate for FY15 has been hovering around 73.7%, slightly lower than previous financial years (Figure #3). We opine that lower utilization rate is due to: (1) switch in production towards more commercial orders; and (2) higher base as more capacity was added in FY15.

• Management also gave some colours on its recent acquisition of MLD. At present, condom sold by MLD commands circa 20-30% premium as compared to Karex’s ASP. Karex has yet to leverage on MLD’s ability of producing 0.04mm (premium thinnest condom) versus its inhouse production of 0.05mm. In addition, they hinted that while sitting on cash pile of RM208.2m, next series of acquisitions will more likely skewed towards overseas brand.

• After few months delay, Hat Yai plant is ready for commission in 1st week of Sept, with six production lines to begin with. Upon completion, there will be additional 1bn pcs capacity to be added on top of existing 1.2bn pcs currently.

Risks

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

Forecasts

• No change in forecasts and we introduce FY18E numbers.

Rating

HOLD , TP: RM3.51

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

• HOLD recommendation is maintained but our TP is li fted to RM3.51 from RM3.09 as we roll over our valuation to CY17.
• Our valuation is pegged to unchanged P/E multiple of 23.8x of CY17 EPS, based on +2SD above its international peers.

Source: Hong Leong Investment Bank Research - 27 Aug 2015