KAREX (5247) : Karex - The Next Level
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
