Results

• 1QFY16 revenue of RM76.1m (+8.5% yoy, -3.6% qoq) was translated into adjusted core PATAMI (excluding derivatives loss of RM3.1m) of RM25.0m (+95.2% yoy), accounting for 31% and 29.4% of HLIB and consensus full year estimates, respectively.

Deviations

• Due to better than expected margin arising from raw materials and higher economies of scales.

Dividends

• None (1QFY15: None).

Highlights

• 1QFY16 revenue increased by 8.5% yoy thanks to higher volume from condom commercial sales segment. However, it dropped by 3.6% qoq, mainly due to delay in acceptance by customers of Karex’s finished products , which resulted in Karex’s inventory increasing over the same period.

• EBITDA margin has been trending upwards from 26.1%, 27.2% and 36% for 3Q15, 4Q15 and 1Q16, respectively. Margin expansion was mainly attributed to higher sales of better margin products as well as favourable forex and lower latex prices.

• Installed production capacity stands at 4.0bn pcs in current quarter and will inch up to 4.5bn pcs by end-CY15. Management guided that installed production capacity is expected to rise close to 6.0bn pcs (additional 1bn pcs from Thailand and 1bn pcs from Pontian plant) by end-CY16. Utilization rate in 1QFY16 rose slightly to 72.2% from 71.1% in 4QFY15 owing to larger portion of tender orders being undertaking in current quarter. This is still within the comfortable level of 70-75%.

• Demographically, Asia and Africa remained as key regions. Cont ribution from both regions stood at 31% in current quarter. Moreover, cont ribution from American region continues to grow from 25% (4Q15) to 30% (1Q16) as a result of the increase in orders from Brazil.

• Product mix ratio between condoms, catheters and probe covers & lubricating jelly remains fairly constant at 92:5:3. CAPEX of RM80m is expected for CY16 according to management. Impact of increased minimum wage from RM900 to RM1,000 per month (effective 1st January 2016) is insigni ficant as only circa 90 out of total about 2,600 staff are paid below RM1,000.

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 updated with management.

Rating

• HOLD , TP: RM3.51

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 as well as our TP of RM3.51.
• Our valuation is pegged to unchanged P/E multiple of 23.8x of CY17 EPS, based on historical 2-year average P/E multiple.

Source: Hong Leong Investment Bank Research - 1 Dec 2015