After  our  recent  meeting  with  management,  we  raise  our  FY14F-15F earnings  forecasts  by  12-26%  as  we  become  more  upbeat  on  the company’s outlook. We continue to like Karex for its lead in the condom manufacturing  industry  and  strong  earnings  growth  spurred  by capacity  expansion.  Maintain  BUY, with  our FV  lifted  to  MYR4.43  (from MYR3.51).

Expansion plans on track. Karex’s expansion plans are well on track to achieve  its  target  to  add  1bn  pieces  annually  to  6bn  pieces  by  2015. According  to  management,  utilisation  rates  currently  stand  at  about >80%,  with  lead  time  of  4-5  months,  even  after  four  new  lines  were installed  in  2QFY14.  We  gather  that  the  company  has  steady  orders from  existing  and  new  customers  from  both  the  tender  and  commercial markets  to  fill  up  its  new  capacity.  Moving  forward,  Karex  expects  to normalise its lead time to 1-2 months with average utilisation rates of 70-75%, which are the optimal levels for condom manufacturers. 

Minimal  impact  from  electricity  hike.  On  2  Dec,  the  Malaysian Government announced that electricity tariffs will be raised by 16.85% to 38.5  sen/kilowatt  hour  (kWh)  from  1  Jan  2014.  Management  believes that  the impact  will  be  limited as  electricity  costs  only  make  up  5-6% of the company’s  total  production  cost  and  can  easily  be  mitigated  by easing raw material prices and the appreciation of the USD vs MYR.  

Revising  estimates  higher.  In  view  of  the company’s positive outlook, we raise our FY14F-15F earnings estimates by 12-26%, as our previous assumptions  were  too  conservative.  We  revise  our  latex  price assumption to MYR5.50/kg (from MYR6.00 per kg) and lift our utilisation rate  assumption  to  67-70%  (from  65-67%). We  are now  forecasting  net profits of MYR44.0m-59.8m for FY14F-15F respectively.  

Maintain  BUY.  Consequently,  we  bump  up  our  FV  to  MYR4.43  (from MYR3.51), based on an existing 20x P/E on FY15 earnings, which  is in line  with  our  target  valuation  for  Hartalega  (HART  MK,  BUY,  FV: MYR7.95).  We  continue  to  like  Karex’s:  i)  leadership  in  the  condom manufacturing  industry,  ii)  strong  earnings  growth  spurred  by  capacity expansion,  and  iii)  stable  operating  environment  amid  stabilising  raw material prices and the appreciation of the USD against MYR.

Financial Exhibits

SWOT Analysis

Company Profile

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

Recommendation Chart

Source: RHB