Despite challenging operating environment, we believe Karex’s risk-reward profile is attractive and a lot of negatives appear to be priced in after tumbling 23% from a 52-week high of RM0.645 to RM0.495. Current P/B of 1.05x is undemanding (-65% below 5Y mean of 3x), supported by 39% EPS CAGR from FY20-22. We see better quarters ahead as 1) production capacity normalises post-MCO; 2) leverage on cost advantages via the implementation of automation and investment into OBM segment’ 3) lesser social compliance costs on completion of final social audits; and 4) upward trending ASP since early 2020, further aided by coronavirus-led demand. Technically, share price is likely to stage a technical rebound following the hammer candlestick formation to re-challenge the RM0.555-0.60 upside targets.

Things getting back on right track. Karex’s share prices slid 23.3% from 52-week high to RM0.495 last Friday, mainly driven by a weak 3Q20 results amid challenging global condom industry with shifting trends in condom purchasing patterns, uncertainty surrounding humanitarian aid budgets around the world, erratic costs for raw material, higher social compliance costs coupled with operating capacity constraints during the MCO period. Moving forward, we see improving quarters ahead as 1) production capacity normalises post-MCO; 2) leverage on cost advantages via the implementation of automation and investment into OBM segment’ 3) lesser social compliance costs on completion of final social audits; and 4) upward trending ASP since early 2020, further aided by coronavirus-led demand.

Potential downtrend reversal following the hammer candlestick formation. Following a subdued 3QFY20 results mainly due to the limited operating capacity during the MCO period, Karex’s share prices tumbled 28% from 52-week high of RM0.645 (13 May) to a low of RM0.465 (12 June) before ending at RM0.495 last Friday. We expect prices to bottom up amid the formation of hammer candlestick and closed above the 200D SMA levels near RM0.465. A decisive breakout above RM0.51 (23.6% FR) is likely to spur prices higher towards the RM0.555 (50% Fr) before reaching our long term objective of RM0.625 (1 June) levels. Key supports are RM0.465 and RM0.45 levels. Cut loss at RM0.445.

Source: Hong Leong Investment Bank Research - 15 Jun 2020