1QFY15 (Jun) earnings met expectations and we expect a stronger 2H.  We keep our BUY recommendation on Karex with an unchanged TP of MYR3.43 (20x FY5F P/E, 13% upside).   Its margin improved thanks to a favourable  operating  environment,  while  its  capacity  expansion  plan and growth strategy for Global Protection remain on track. Karex is also eyeing new products and markets to propel its earnings.  

Results in line. Karex’s 1QFY15 net profit of MYR12.8m (+26.7% YoY) came in within expectations as we believe 2H would be stronger, backed by  additional  new  capacity  at  its  Hat  Yai  plant.  For  the  quarter  under review,  the  revenue  increase (+7.2%  YoY)  was  mainly  driven  by  higher sales  volume  whereas  the  increase  in  pre-tax  profit  (+31.7%  YoY)  was attributed  to  sales  of  higher-margin  products,  favourable  currency exchange rates and low raw material costs.  

Outlook. Management guided that the completion of its plant in Pontian, Johor may be delayed due to the re-design of certain parts of the plant to accommodate  the  new  polyisoprene  dipping  lines  and  its  own  high dipping  lines.  Meanwhile,  its  Hat  Yai  plant  has  begun  to  expand  with additional  capacity  of  1.0bn  pieces  and  is  scheduled  to  commence operation by 4QFY15.  The company targets to achieve annual capacity of  5bn  pieces  by  end-FY15,  6bn  in  FY16  and  7bn  in  FY17.  As  for  its newly-acquired  Global  Protection  (GP),  Karex  is  planning  to  launch  the brand in this region by 1H 2015. See our 30 Oct 2014 report Karex Bhd : Poised For The Next Growth Phase on how the company could monetise the  acquisition  of  GP.  Karex  is  also  venturing  into  new  products  and markets  to  stimulate  its  growth  –  it  plans  to  launch  new  polyisoprene condoms by early next year and set up a new base in Europe within the next three months to expand its market.

Maintain  BUY.  We  maintain  our  BUY  recommendation  with  an unchanged TP of MYR3.43, pegged to a 20x FY15F P/E. Our target P/E of 20x is at a slight discount to Hartalega Holdings’ (HART MK, BUY, TP: MYR7.70)  target  P/E  of  21x,  which  is  justifiable  for  its  high  expected growth rate.

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

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Source: RHB