News

• Karex had on 26 January 2016 entered into an asset purchase agreement with TheyFit, LLC, Dr. Michael Cecil and Joseph Nelson for the proposed acquisition of TheyFit’s right, title and interest to certain assets of TheyFit for a cash consideration of USD1.3m (RM5.638m based on the exchange rate of RM4.337/USD1.00) after taking into consideration the TheyFit® trademark, the websites, the Food and Drug Administration (FDA) approvals and intellectual property rights.
• TheyFit® customs fit condoms come in 95 di fferent sizes and have been sold in 28 European member states through its distributors in UK and Europe. Moreover, TheyFit also owns websites which serve as an online platform for the retail market worldwide especially in the US. TheyFit has obtained the FDA approvals to market its condoms in the US market.
• The proposed acquisition will be satisfied entirely in cash, which will be financed by proceeds raised from the private placement exercise completed on 11 March 2015. The proposed acquisition is expected to be completed by end of January 2016.

Highlights

• We are positive on the acquisition as it will enable Karex to complement and expand its existing own brand products family. The acquisition will also allow Karex to develop future brands or undertake rebalancing in various custom fit sizes of condoms. Together with the FDA approvals, Karex will be able to market new custom fit condoms to US and global markets to further expand its market share.
• The acquisition only represents 2.6% of Karex’s FY16 net cash of RM214.73m. Balance sheet remains healthy as post acquisition net cash per share is still high at 31 sen or equivalent to 7.6% of its share price.

Forecasts

• No change in forecasts.

Rating

• HOLD , TP: RM4.52

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 with an unchanged target price of RM4.52. Our valuation is pegged to unchanged P/E multiple of 26.9x of CY17 EPS, based on +1SD above 2-year historical average P/E.

Source: Hong Leong Investment Bank Research - 27 Jan 2016