Karex reported a solid 1QFY14 net profit of MYR10.1m that beat our and consensus  expectations,  making  up  25.9%  of  both  full-year  forecasts. The  robust  results  were  credited  to  its  increased  sales  volume  and improved production efficiency. That said, we  maintain our BUY call on the stock, with  our FV bumped  up to MYR3.51,  based on a higher  20.0x FY15 P/E.

• Marginally  ahead.  Karex’s  1QFY14  results  came  in  ahead  of  our  and consensus  expectations,  reaching  25.9%  of  both  FY14  estimates respectively. The company posted revenue of MYR65.4m, up 18.7% y-oy. This was  contributed by  a  higher sales volume on the back of higher production capacity.  Correspondingly, its net profit  surged  84.1%  y-o-y, as  further  automation  of  its  production  lines  enhanced  production efficiency.
• 1-for-2 bonus issue. Karex also announced plans to undertake a bonus issue of up to 135.0m bonus shares   on the basis of 1 new bonus  share for every 2 existing shares  in the company.  The bonus issue, which  will be fully capitalised from its share premium, will enlarge  its share base to 405.0m from 270.0m currently. We believe that this exercise will improve trading  liquidity.  Based  on  its  last  closing  price  of  MYR3.17,  the theoretical share price will be adjusted to MYR2.11 ,  while our ex-bonus FV would be reduced to MYR2.34.
• Risks.  The key risks include: 1)  volatility  in  raw material prices,  and  11) foreign currency fluctuations.
• Maintain BUY. We maintain our BUY call on the stock and bump up our FV  to MYR3.51,  based on a higher 20.0x  target  P/E  on FY15 earnings, in  line  with  our  target  valuation  of  20.0x  for  Hartalega.  In  our  opinion, Karex deserves to trade at a premium for its scarcity value, leadership in the  condom  manufacturing  industry,  backed  by  its  increasing  capacity, and stronger-than-expected institutional interest and participation.

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SWOT Analysis

Company Profile
Karex Bhd is the word's largest condom manufacturer with global market share of 11%.

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Source: RHB