Karex proposed to acquire the remaining 30 shares in Global Protection Corp. (GP) (company incorporated in US), representing 30% of the equity interest in GP for a purchase consideration of RM42.3m via the issuance of up to 82.9m new ordinary shares in Karex. The proposed acquisition is expected to complete by end of the year. While the acquisition would help to plug MI leakage, we estimate that FY21-22 EPS would be diluted by 3% and 2% post share issuance. We keep our forecasts pending completion of the acquisition. We maintain BUY, with unchanged TP of RM1.20. Our TP is a function of 2.4x FY21 BVPS of 49.5 sen.

NEWSBREAK

Karex has proposed to acquire the remaining 30 shares in Global Protection Corp. (“GP”, a company incorporated in US), representing 30% of the equity interest in GP for a purchase consideration of RM42.3m via the issuance of up to 82,934,164 new ordinary shares in Karex.

GP is principally involved in the distribution, packaging and marketing of condoms, personal lubricant and related products to retail and healthcare markets in North America. The proposed acquisition is expected to be completed by end 2020.

HLIB’s VIEW

Recap. Karex first acquired a 55% equity interest in GP back in 2014 and further increased its equity interest to 70% in 2018. GP has been providing services to Karex for more than 20 years.

In line with strategy. We feel the acquisition is in line with Karex strategy to expand its own brand manufacturing business. Karex will be able to fully benefit from the manufacturing and distribution of GP which will further increase Karex’s market share at the international forefront in the sexual wellness business by leveraging on GP’s products.

EPS dilutive. With GP being 100% wholly owned by Karex, we expect this to contribute positively to the future earnings of Karex. GP’s historical PAT was FY18: USD0.25m, FY19: USD0.48m and FY20: USD2.58m. With GP being a wholly owned subsidiary post acquisition, MI leakage would be plugged. For perspective, in FY20, Karex’s MI stood at RM3.3m, with Core PATMI of RM1.4m. Post issuance of new shares and plugging of MI leakage, we estimate that FY21-22 EPS would be diluted by 3% and 2% respectively.

Forecast. We maintain our forecasts pending completion of the acquisition.

Maintain BUY, TP: RM1.20. We maintain BUY with unchanged TP of RM1.20. Our TP is a function of 2.4x FY21 BVPS of 49.5 sen. Maintain BUY.

Source: Hong Leong Investment Bank Research - 13 Nov 2020