Karex announced a proposed acquisition of a 100% stake in MedicalLatex (Dua) SB (MLD) from Beiersdorf AG for MYR13m. We view the acquisition positively given the strong synergistic potential with its existing operations. Maintain BUY with a revised TP of MYR3.70 (from MYR3.63, 20% upside).

M&A announcement. Karex announced a proposed acquisition of MLDfrom Beiersdorf AG for a cash consideration of MYR13m. As at end-Dec 2014, MLD had a net asset of MYR11.87m and a net loss of MYR2.97m. The purchase price represents a P/BV ratio of approximately 1.09x.Upon completion, MLD will settle an outstanding MYR2m loan owed to Beiersdorf AG. Karex would inherit the original equipment manufacturer (OEM) contracts to produce condoms for Biersdorf as well as two brands, the ESP (Enjoyable Safe Pleasure) and N’JOY which are distributed in Malaysia and Singapore.

Positive synergies. MLD has a 140-strong workforce with a production capacity of 165m condom pieces pa. This translates to 1.18m condomsper labour (cpl) per annum, lower than Karex’s existing operations of2.08m cpl. Management is confident of turning around MLD within 12 months by employing better operating standards and boosting MLD’sSenai factory output to 500m pieces pa.

M&A trail. Recall that Karex raised MYR158m in Mar 2015 through the placement of 40.5m new shares, of which MYR110m was slated for M&Aand MYR48m for working capital. Subsequently, Karex purchased two pieces of land in Pontian for MYR14.8m in Apr 2015. Factoring in theMLD acquisition, Karex still has a sizeable MYR82.2m war chest for further acquisition, which could be a catalyst for FY16 (Jun).

Maintain BUY. We lift our FY16-17F earnings by 3-6% after updating our FY16F USD FX assumption to 3.80 (from 3.50), as well as factoring in the potential synergies from the MLD acquisition. We believe the recent share price retracement (-14% from a 52-week high in Jul 2015) provides an interesting accumulation opportunity. Karex is currently trading at 23.9x FY16F P/E, lower than its 1SD historical trading band of 27.8x. Reiterate BUY with a revised TP of MYR3.70 (from MYR3.63, 20% upside, 8.9% COE, 3% TG). This implies FY16F P/E of 28.6x. The key risk to our recommendation would be potential delays in executing its OEM and own brand manufacturing (OBM) expansion plans.