Karex posted a core LATAMI of -RM5.3m in 4QFY21, bringing full-year FY21 core LATAMI to -RM4.1m. Its performance came in below both our and street estimates at -RM13m and -RM6m LATMI respectively. The weaker-than-expected earnings were predominantly due to higher-than-expected distribution cost, on the account of rising freight charges. We cease our coverage on Karex, due to a lack of institutional investor interest and lack of earnings clarity. Our previous HOLD recommendation and target price of RM0.58 (pegged to PB multiple of 1.2x, at -0.75SD below 5-year average) on Karex should also no longer be used as a reference going forward.

Below expectations. 4QFY21 core LATAMI of -RM5.3m (from -RM6.0m LATAMI QoQ and RM4.4m PATAMI YoY) brought full-year FY21 core LATAMI to -RM4.1m (from core LATAMI of -RM1.9m in FY20). Core LATAMI was arrived at after taking into account a foreign exchange gain of RM3.1m. The results came in below both our and consensus LATMI estimates at -RM13m and -RM9.6m respectively. The weaker results were attributed to the significantly higher freight charges YoY.

Dividend. No dividends were declared for FY21. (FY20: 1.0sen)

QoQ. Revenue grew by 11.6%, on the back of higher sales volume as deliveries for tender orders that were previously delayed, were delivered during the current quarter. Management guided that tender orders accounted for 23% of its total sales in 4QFY21 (vs. 14% in 3QFY21). Higher distribution cost (+47.2% QoQ) has impacted Karex’s profitability, as it opted for air freight to shorten shipment duration, leading to a reported LATAMI of -RM5.1m (from reported LATAMI of -RM3.2m in 3QFY21). Stripping out the foreign exchange gain of RM160k, core LATAMI stood at -RM5.3m (vs. core LATAMI of -RM6m in 3QFY21).

YoY. Revenue growth of 17.2% was achieved on the back of higher revenue contribution from its Sexual Wellness and Medical segment. However, the implementation of MCO3.0/Phase 1 in Malaysia has prohibited Karex from operating at full capacity and has also resulted higher operational and logistic expenses. This ultimately resulted to a core LATAMI of -RM5.3m.

YTD. Stronger revenue (+6.3% YoY) was predominantly due to higher selling prices and additional new orders. Core LATAMI of -RM4.1m (from core LATAMI of RM1.9m) was due to the same reasons mentioned above.

Outlook. As vaccination rate continues to climb globally and with more nations slowly returning to normalcy, management expects to see a gradual recovery in Karex’s financial performance. However, we are of the view that the high freight charges will continue to weigh down on the Group’s near-term profitability. Commencement of its glove production in Hatyai, Thailand has also been delayed, with trial run expected to begin in end-CY21, given the delay in production line installation.

Forecast. Unchanged.

Cease coverage. We cease coverage on Karex due to the lack of interest from institutional investors, as well as a lack of earnings clarity. Our previous Hold rating and TP of RM0.58 (pegged to PB multiple of 1.2x, at -0.75SD below 5-year average) on Karex should no longer be used as a reference point forward.

Source: Hong Leong Investment Bank Research - 30 Sept 2021