Karex’s 1HFY21 core PATMI of RM7.1m was above our expectations, but below consensus forecasts at 61.4% and 42.3% respectively. The positive results surprise was due better-than-expected ASPs. We raise our FY21/22/23 forecasts by 17.4%/34.0%/33.3% to account for higher ASPs going forward. Despite changes in our forecasts, our TP of RM1.19 (pegged to -0.25 SD below 5 year average P/B of 2.42x) remains unchanged. Maintain BUY.

Above expectations. 2QFY21 core PATAMI of RM1.3m (-78.7% QoQ, +67.3% YoY) brought 1HFY21 core PATMI to RM7.1m (from -RM0.3m LATMI in 1HFY20). Core PATAMI was arrived at after adjusting for foreign exchange gains of RM0.1m. This was above our expectations, but below consensus forecasts at 61.4% and 42.3% respectively. The positive results surprise was due better-than-expected ASPs.

Dividend. None declared. (1HFY21: None). 2QFY21: 0.5 sen (1HFY20: 0.5 sen).

QoQ. Revenue rose +13.8% due to higher sales volume, particularly in the tender market. However, Karex sales in the sexual wellness segment to the OBM (original brand manufacturing) market shrank (2QFY21: 10% of sexual wellness sales vs. 1QFY21: 15% of sales) at the expense of the tender market (2QFY21: 36% of sexual wellness sales vs. 1QFY21: 27% of sales) resulting in slimmer margins. Note that OBM gross profit margins are significantly higher (~45%) than the tender market (10- 12%). Coupled with higher expenses related to Covid-19 (increased testing, sanitisation etc.), core PATAMI shrank -78.7%.

YoY. Sales grew 6.1% of the back off stronger condom and personal lubricant sales to both the tender and commercial markets. Bottom line grew by a significantly higher quantum (+67.3%). Karex shared this was due to higher ASPs which were due to (i) competitors raising prices from higher raw material cost being passed onto customers and (ii) supply from competitors being affected by production and logistic issues during the Covid-19 pandemic, leading to better pricing power for Karex.

YTD. Higher sales (+6.2%) was mainly due to increased condom sales to the commercial market. Karex recorded core PATAMI of RM7.1m (from -RM0.3m LATMI). This was due to better pricing power as competitors struggling to produce sufficient volumes during the Covid-19 pandemic as explained above.

Outlook. Sales to the OBM market shrank to 10% of sexual wellness sales in 2QFY21 (from 18% in FY20) due to certain sales channels being affected during the pandemic. Note that a portion of OBM sales are sold to universities in the US (which typically hand out products on campus) and UK’s National Health Service whose non Covid related operations have been hampered. With the roll out of vaccines in the US and the UK picking up steam, we reckon it is only a matter of time b efore sales to the more lucrative OBM market pick up. With regards to Karex’s glove venture, the group expects production to begin in July-21, with the first line expected to product 20m pieces per month, with production lines to be added shortly after.

Forecast. We raise our FY21/22/23 forecasts by 17.4%/34.0%/33.3% to account for higher ASPs going forward.

Maintain BUY, TP: RM1.19. Despite changes in our forecasts, our TP of RM1.19 (pegged to -0.25 SD below 5 year average P/B of 2.42x) remains unchanged. Maintain BUY.

Source: Hong Leong Investment Bank Research - 23 Feb 2021