Our  earnings  forecasts  remain  intact.  We  maintain  our  BUY recommendation on Karex  with a revised  MYR3.89  TP (from MYR3.43) on 20x FY16F P/E. This represents a 14.4% upside.  We are confident on the company’s  earnings growth, led organically by capacity expansion as  well  as  its  inorganic  growth  through  the  acquisition  of  Global Protection Corp.

Growth prospects intact.  We like Karex  for its strong earnings growth potential  on  the  back  of  expanded  production  capacity  and  strong demand for its products.  The company  is expecting to have  an  annual production  capacity  of  5bn  pieces  by  end-FY15  and  will  increase  this further to 6bn  by end-FY16. It  is also expanding inorganically via newlyacquired  Global  Protection  Corp  (GP)  to  grow  its  own  brand manufacturer  (OBM)  division  and  create  synergies  for  its  original equipment manufacturer (OEM) business.

Favourable  operating  environment.  The  price  of  natural  rubber  latex has eased to MYR3.75 per kg (2013 average: MYR5.63 per kg), which is favourable  for  Karex.  As  its  products’  ASPs  do  not  fluctuate  with  raw material  prices,  the  company  should  be  able  to  keep  its  earnings margins.

Stronger  USD/MYR.  The  strength  of  the  USD/MYR  exchange  rate  is expected to benefit Karex,  as revenue will have a greater sensitivity to the  greenback  relative  to  costs.  A  3%  increase  in  the  USD/MYR exchange rate could possibly raise earnings by around 3-4%.

Risks and forecasts. Risks in 2015 are: i) execution that underperforms expectations  with regards to the  launch of the GP brand in this region, and ii)  the introduction  of polyisoprene condoms.  Our forecasts  remain unchanged.

Maintain  BUY.  We  maintain  our  BUY  recommendation  with  a  TP  of MYR3.89  (from MYR3.43), rolling over valuations and  pegging the stock to  20x  FY16F,  a  slight  discount  to  Hartalega’s  (HART  MK,  BUY,  TP: MYR8.04) 21x. We think this is justified considering Karex’s leadership in the condom market as well as an expected 3-year FY14-17F EPS CAGR of 23.8%.

Source: RHB