Karex’s FY18 core PATAMI of RM16.1m (-48.8% YoY) was above our expectation and consensus. The deviations in the results are mainly due to better cost controls QoQ and the lower base effect. ASP revision remains sticky amidst the background of mounting input prices. Maintain forecast. We remain concerned about the mismatch between ASP revision and sky rocketing input costs amidst the competitive industry landscape. Maintain our SELL call as valuations remain demanding.

Above. FY18 core PATAMI of RM16.1m (-48.8% YoY) was slightly above expectations, accounting for 107% of HLIB full year estimate (consensus: 120%). The results were above due to better cost control in 4Q18, namely distribution expenses declining by c.17% and earnings amplification from the lower base.

QoQ. Revenue decreased to RM93.4m from RM96.5m (-3.2% QoQ). GP margin deteriorated QoQ to 25.3% on a less favourable product mix. Distribution costs (freighting) were lower QoQ (-17%) as Karex focused on the commercial segment in 4Q18. Nonetheless, core PATAMI of RM2.2m (-31.2% QoQ) came in lower, attributable to unfavourable forex movements.

YoY. Revenue grew 1.9% to RM96.3m on higher sales from sexual wellness (+2.1%). Despite this, EBITDA declined to RM6.6m (- 5.5%) attributed to a higher fixed costs, input costs and an unfavourable forex environment. Consequently, EBITDA margin declined by 0.6 ppts to 7.1%.

YTD: Revenue of RM408.0m (+12.9% YoY) was achieved on the back of a stronger performance in the sexual wellness division (+14.3% YoY). EBITDA declined to RM28.1m (-40.3% YoY) attributed to higher distribution (+32.4%) and admin expenses (+15.6%) and input costs (silicone oil c. +200% yoy). GP margin declined to 26.3% (12M17: 30.8%) due to competitive pricing as well as unfavourable forex.

Forecast. We are keeping our forecast unchanged despite stronger than expected results. We remain concerned about the mismatch between ASP revision and sky rocketing input costs amidst the competitive industry landscape. Thus on that premise we leave our FY19-20 earnings forecast unchanged.

Maintain SELL, TP: RM0.51. Maintain our TP of RM0.51. Our valuation is based on CY19 earnings pegged to a P/E multiple of 24.1x (-1 SD). Maintain our SELL call. Whilst we are long term positive on its ambition to capture the huge upside in margin expansion from the OBM segment; near term prospects remain pressured by sticky ASP amidst a run in input cost prices. Furthermore, valuations are rather demanding at current prices.

Source: Hong Leong Investment Bank Research - 29 Aug 2018