Karex’s 1QFY21 revenue of RM101.7m (+11.7% QoQ, +6.3% YoY) brought core PATMI to RM6.7m (+24.3% QoQ, 1QFY20: -RM0.9m). The results came in above ours (63%) and consensus (43%) expectations due to better than expected revenue contribution. Higher revenue was achieved thanks to better contribution by all segments, with most prominent increase from Medical segment with higher demand for probe covers and catheters. This was mainly due to the recovery from the previous quarter whereby Karex faced a halt in operations and logistics during MCO. We increase our FY21-22 forecast by 200-124% (low base effect) to better reflect the group’s better performance expectation. Our TP increases to RM1.21 (from RM1.20) based on 2.42x FY21 BVPS of RM0.50 (-0.25 SD below 5Y mean). Maintain BUY.

Above expectations. 1QFY21 revenue of RM101.7m (+11.7% QoQ, +6.3% YoY) brought core PATMI RM6.7m (+24.3% QoQ, 1QFY20: -RM0.9m). Core PATMI was achieved after eliminating EIs comprising provisions on write off inventories and foreign exchange loss, of -RM2.3m. The results came in above ours and consensus expectations at 63% and 43% of full year forecast respectively, due to better than expected revenue contribution.

QoQ. Revenue rose to RM101.7m (+11.7%) thanks to improvement in all segments; (i) Sexual Wellness (+7.9%), (ii) Medical (+78.4%) and (iii) Others (+14.5%). Medical division thrived with heightened emphasis on hygiene globally resulting in higher demand for probe covers and catheters. Overall, the improvement was mainly due to the return of operations for manufacturing and logistics during the quarter. To recap, Karex’s faced hiccup in the previous quarter during the implementation of MCO where there was a halt in operations for 14 days. PBT improved to RM7.0m (+64.6%) with lower other (-255%) and interest expenses (-30.2%). Core PATMI improved to RM6.7m (+24.3%) with lower effective tax rate of 26% (vs. 4QFY20: 38%).

YoY. Revenue increased +6.3% due to better contribution from all segments; (i) Sexual Wellness (+4.2%), (ii) Medical (+29.2%) and (iii) Others (+23.8%). PBT improved amid a low base by +2000% with lower COGS (-3%) thanks to cost control initiatives and automation as well as higher other income (+13.4%). Core PATMI improved by +24.3% with lower effective tax rate (vs. 1QFY20: 41%).

Outlook. Karex remains optimistic on FY21 with expectation of higher sales as evident in this first quarter. Also, it is hopeful on their branded segment to expand into new markets in the South East Asia region. Karex’s plan to manufacture gloves is on track with expectation to commence by Jun 2021.

Forecast. We increase our FY21-22 earnings forecast by 200% and 124% (low base effect) to reflect the higher revenue and lower costs moving forward. We introduce our FY23 numbers.

Maintain BUY, TP: RM1.21. Post earnings adjustments, our TP increase to RM1.21 (from RM1.20). Our TP is a function of 2.42x FY21 BVPS of 50 sen (-0.25 SD below 5Y mean). Maintain BUY.

Source: Hong Leong Investment Bank Research - 24 Nov 2020