Highlights

• Brazil has seen an unusual surge of the vi rus cases since its first discovery in May 2015. The nation is experiencing 20 times more microcephaly cases reported in 2015 than normal (see Figure #3 and #4). The fatality is unknown.

• In Feb 2016, the WHO declared a Public Health Emergency of International Concern due to clusters of microcephaly and other neurological disorders in some areas affected by Zika. Centers for  Disease Control and Prevention has also elevated its Emergency Operations Center activation to Level 1 (the highest level) to respond to outbreaks of the virus occurring in the Americas and increased reports of birth defects and Guillain-Barré syndrome in affected areas.

Comments

• We believe that this outbreak could lead to higher demand for condoms as South American governments including Brazil and Colombia are advising women to avoid pregnancy. Meanwhile, the world has been on alert mode amid growing fears of a loss of control.

• For the time being, there is no specific treatment or vaccine available. WHO announced on 12 Feb 2016 that large-scale trials of the vi rus vaccine are at least 18 months away. As such, we view this unfortunate development to be a potential rerating catalyst for Karex.

Forecasts

• We maintain our earnings forecasts despite the potential upside from Zika virus outbreak.

• We note that the strong USD catalyst may diminish in 2H16 as ringgit is poised to maintain its strength given resilient economic fundamental. In this regard, we have a conservative RM3.80/US$ ringgit assumption in our  Y17 and FY18 forecasts.

Rating

BUY  , 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

• We upgrade to BUY recommendation from hold with an unchanged target price of RM4.52, given the recent share price retracement and the potential higher condom demand over the next 18 months caused by Zika virus. 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.