Karex’s 3QFY21 core LATAMI of -RM6.0m brought 9MFY21 core PATMI to RM1.1m (from -RM6.0m LATMI in 9MFY20), which is below ours and consensus forecasts at 8.1% and 7.9% respectively. The surprise loss was due to (i) lower sales from disruptions in operations from Covid-19 and (ii) significantly higher freight costs. We lower our FY21/22/23 forecasts by -34.4%/14.6%/6.1% to account for Covid-19 disruptions on productions, increased logistics costs and delays in Karex’s glove venture. After lowering our PB multiple to 1.2x (-0.75SD below 5 year average), our TP falls to RM0.58 (from RM1.19 previously). Downgrade to HOLD.

Below expectations. 3QFY21 core LATAMI of -RM6.0m (from RM1.3m PATAMI QoQ and -RM5.7m LATAMI YoY) brought 9MFY21 core PATMI to RM1.1m (from -RM6.0m LATMI in 9MFY20). Core PATAMI was arrived at after adjusting for foreign exchange gains of RM2.9m. This was below ours and consensus forecasts at 8.1% and 7.9% respectively. The surprise loss was due to (i) lower sales and lower production efficiencies Covid-19 disruptions and (ii) significantly higher freight costs.

Dividend. None declared. (9MFY21: None). 3QFY21: None (9MFY20: 0.5 sen).

QoQ. Revenue shrank -17.4% as several orders were not able to be delivered during the quarter, with orders in the tender segment particularly being affected. Karex shared that tender sales made up just 14% of total sales (vs. 33% of total sales in FY20). Implementation of MCO2.0 during the quarter led to additional Covid-19 related expenses and operational disruptions, leading to core LATAMI of -RM6.0m (from core PATAMI of RM1.3m in 2QFY21).

YoY. Logistics issues and Covid-19 impact on operations resulted in lower sales (- 3.6%). Karex guided that there were significantly heightened costs during the quarter, namely: (i) RM4.5m costs related to Covid-19 (testing, sanitisation, loss of efficiencies from disrupted operations etc.) and (ii) higher shipping and freight charges of RM3.5m. This led to core LATMI of -RM6.0m (from -RM5.7m loss).

YTD. Higher revenue (+3.0%) was primarily due to stronger condom sales to the commercial market in Asia and Americas regions. Core PATAMI of RM1.1m (vs. - RM6.0m LATAMI) was due to favourable sales mix and better pricing power, as competitors struggled to produce sufficient quantities during 1HFY21.

Outlook. The chronically high shipping cost is expected to result in significantly higher logistics cost going forward. With regards to Karex’s glove venture, it expects this to be delayed to 2QFY22 (or 4QCY21) from July-21 previously, as machinery installations are being delayed. The first line is expected to produce 20m pieces per month, with production lines to be added shortly after.

Forecast. We lower our FY21/22/23 forecasts by -34.4%/-14.6%/-6.1% to account for Covid-19 disruptions on productions, increased logistics costs and delays in Karex’s glove venture.

Downgrade to HOLD, TP: RM0.58. We lower our PB multiple to 1.2x (-0.75 SD below 5 year average) from 2.42x previously to factor in lower earnings visibility from Covid- 19 disruptions on operations, logistic issues and delays in Karex’s glove venture. Our TP falls from RM1.19 to RM0.58. Downgrade to HOLD.

Source: Hong Leong Investment Bank Research - 25 May 2021