Karex’s 2HFY14 net profit of MYR21.4m  was  in line with our but above consensus estimates. The commendable earnings were attributed to an increase  in sales volume on the back of expanded production capacity. We continue to like the company’s  lead in the condom manufacturing industry  and  strong  earnings  growth  for  the  next  two  years.  Maintain BUY, with our FV revised higher to MYR5.11 (from MYR4.43).

• Results  in  line.  Karex’s  2HFY14  revenue  of  MYR147.6m  was  24.3% higher  y-o-y  due  to  rising  sales  volume  stemming  from  its  expanded production  capacity.  Meanwhile,  its  2HFY14  net  profit  of  MYR21.4m, which  surged  46.6%  y-o-y,  was  in  line  with  our  but  above  street estimates,  making  up  49%  and  55%  of  the  full-year  forecasts respectively.  2QFY14  revenue  of  MYR82.2m  and  net  profit  of MYR11.3m  jumped  25.7%  and  11.9%  q-o-q  respectively,  thanks  to increased  sales  volume  and  stable  raw  material  prices.   Even  though margins were down by a slight  0.8%, we attribute this to a one-off listing expense of MYR1.6m incurred during the quarter.   
• Expansion well  on track.  Karex’s expansion plans are on track  to  add new  capacity  of  1bn  pieces,  which  would  bring  its  total  installed production capacity to 5bn pieces (from 4bn pieces)  by the end of 2014. We gather that the group’s  utilisation rate was still high  - at around 80%. Meanwhile, management said that delivery times have been cut to about four  months  (from  five  months),  and  most  of  its  pent-up  orders  have been  met. The company expects  its operations  to  normalise  and  record average  utilisation  of  70-75%,  as  well  as  bring  its  lead  times  to  1-2 months by June this year.  
• Maintain BUY. Although  Karex’s share price has  rallied  by about  133% since  its  listing  and  our  initiation  of  coverage  in  Nov  2013,  we  believe that  there  is  still  room  for  upside  given:  i)  the  company  is  the  world’s largest condom manufacturer, ii)  its  solid FY13-FY15F 2-year net profit CAGR  of  43.5%,  spurred  by  capacity  expansion,  and  iii)  steady operating  environment amid  stabilising  raw  material  prices,  and  iv)  the appreciation of the USD vs MYR. Accordingly, we lift our FV to MYR5.11(from MYR4.43),  based on  the  existing 20x P/E on CY15 earnings.  We believe this is justified given  the stock’s lower implied PEG of 0.48x  vs rubber glove companies’ average 1.5x.

Financial Exhibits

SWOT Analysis

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

Recommendation Chart

Source: RHB