Venturing Into Rubber Glove Manufacturing

• Although Karex turned profitable in 4QFY20, PATAMI for FY20 at RM0.23m (-91% yoy) still fell short of both our and consensus expectations, delivering only 31% and 55% of the respective forecasts
• To improve its profitability, Karex aims to spend around RM77m to increase its stake in Global Protection (OBM) and venture into the glove manufacturing business
• Although we have raised our earnings forecasts for FY21-22 by 28%-106% to factor in the new development, and raised our P/BV-based 12-month TP to RM0.50, we are still maintaining our SELL call

Competition Has Started to Ease, But Volumes Still Contracting

Despite the 8.1% qoq decline in revenue for 4QFY20, Karex delivered PATAMI of RM1.43m, which is a significant improvement over the LATAMI of RM1.13m in 3QFY20. The improvement was driven by an increased contribution from its higher-margin OBM segment, and a higher ASP revision for its tender market. We believe that Karex’s ability to raise ASPs for the tender market is a positive sign that competition has started to ease. But, the overall contribution is unlikely to revert to previous levels as the overall tender volume continues to decline since the cutback by NGOs. A volume recovery would be an upside risk to our forecast.

Spending More to Drive Future Profitability

Karex guided that it will acquire the remaining 30% stake in Global Protection, which is currently profitable, to boost the contribution of its OBM segment, for around RM37m, based on our estimates. Apart from that, Karex also guided that it will spend RM40m to venture into the glove manufacturing business by building a glove factory in Thailand with an initial total capacity of 500m pcs/year. Although Karex plans to produce medical grade latex (natural rubber and ntirle) gloves, the focus will be on the retail market rather than the healthcare segment, as it is dominated by existing players. We believe that any material contribution will only be in FY22.

Maintain SELL With a Higher TP of RM0.50

We raise our EPS forecasts for FY21-22 by 28%-106% to factor in the increased contribution from Global Protection, and introduce our FY23 forecasts. However, we raise our TP to RM0.50 from RM0.30 as we have changed our valuation method from DCF to P/BV. Despite raising our TP, based on 1x our FY21 BVPS estimate, we believe that the current share price has already fully reflected the latest development; hence we are keeping our SELL call.

Source: Affin Hwang Research - 25 Aug 2020