Results

• 1HFY16 revenue of RM172.7m (+17.4% yoy) was translated into adjusted core PATAMI (excluding one-off gain from a bargain purchase of RM4.7m) of RM39m (+41% yoy), accounting for 45.8% and 45.3% of HLIB and consensus full year estimates, respectively.

Deviations

• We deem the earnings inline as we expect higher production capacity in 2HFY16.

Dividends

• None (2QFY15: None).

Highlights

• 2QFY16 review… The company recorded an increase in 2QFY16 revenue by 25.4% yoy and 26.9% qoq thanks to higher volume from condom tender sales segment.

• EBITDA margin improved from RM39.3m in 1HFY15 to RM55.7m in 1HFY16, mainly attributed to higher profit margin products as well as favourable forex and lower raw material prices.

• Management guided that installed production capacity is expected to rise to circa 6.0bn pcs (additional 1bn pcs from Thailand and 1bn pcs from Pontian plant) by end-CY16. Utilization rate in 2QFY16 rose slightly to 72.7% from 72.2% in 1QFY16, within the comfortable level of 70-75%.

• Demographically, Asia and Africa remained as key regions. Cont ribution from both regions stood at 39% and 29% respectively in current quarter. While contribution from American region declined marginally from 25% (2Q15) to 22% (2Q16), its absolute contribution was up by RM1.3m in terms of value.

• Product mix ratio between condoms, catheters and probe covers & lubricating jelly remained fairly constant at 93:4:3.

• In a separate announcement, Karex proposed a bonus issue of up to 334m new shares on the basis of one bonus share for every 2 existing shares held. The proposal is expected to be completed by 2QCY16.

• We are neutral to slightly positive on the proposed announcement as it would result in a larger share base capital, enhancing the liquidity and marketability of the shares.

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: RM4.52

Positives

• World’s largest condom manufacturer; Zika virus outbreaks; 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 BUY recommendation as well as our TP 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 - 25 Feb 2016