Karex Bhd -
Target Price: MYR4.43
Strengthening Its Lead
After our recent meeting with management, we raise our FY14F-15F earnings forecasts by 12-26% as we become more upbeat on the company’s outlook. We continue to like Karex for its lead in the condom manufacturing industry and strong earnings growth spurred by capacity expansion. Maintain BUY, with our FV lifted to MYR4.43 (from MYR3.51).
Expansion plans on track. Karex’s expansion plans are well on track to achieve its target to add 1bn pieces annually to 6bn pieces by 2015. According to management, utilisation rates currently stand at about >80%, with lead time of 4-5 months, even after four new lines were installed in 2QFY14. We gather that the company has steady orders from existing and new customers from both the tender and commercial markets to fill up its new capacity. Moving forward, Karex expects to normalise its lead time to 1-2 months with average utilisation rates of 70-75%, which are the optimal levels for condom manufacturers.
Minimal impact from electricity hike. On 2 Dec, the Malaysian Government announced that electricity tariffs will be raised by 16.85% to 38.5 sen/kilowatt hour (kWh) from 1 Jan 2014. Management believes that the impact will be limited as electricity costs only make up 5-6% of the company’s total production cost and can easily be mitigated by easing raw material prices and the appreciation of the USD vs MYR.
Revising estimates higher. In view of the company’s positive outlook, we raise our FY14F-15F earnings estimates by 12-26%, as our previous assumptions were too conservative. We revise our latex price assumption to MYR5.50/kg (from MYR6.00 per kg) and lift our utilisation rate assumption to 67-70% (from 65-67%). We are now forecasting net profits of MYR44.0m-59.8m for FY14F-15F respectively.
Maintain BUY. Consequently, we bump up our FV to MYR4.43 (from MYR3.51), based on an existing 20x P/E on FY15 earnings, which is in line with our target valuation for Hartalega (HART MK, BUY, FV: MYR7.95). We continue to like Karex’s: i) leadership in the condom manufacturing industry, ii) strong earnings growth spurred by capacity expansion, and iii) stable operating environment amid stabilising raw material prices and the appreciation of the USD against MYR.
Publish date: 20/12/13