Karex (5247) =Analysis

Karex Bhd - A Solid 1QFY14

Date: 15/11/2013

Source	:	RHB
Stock	:	KAREX	Price Target	:	3.51	\|	Price Call	:	BUY
			Last Price	:	3.01	\|	Upside/Downside	:	+0.50 (16.61%)

Karex reported a solid 1QFY14 net profit of MYR10.1m that beat our and consensus expectations, making up 25.9% of both full-year forecasts. The robust results were credited to its increased sales volume and improved production efficiency. That said, we maintain our BUY call on the stock, with our FV bumped up to MYR3.51, based on a higher 20.0x FY15 P/E.

Marginally ahead. Karex’s 1QFY14 results came in ahead of our and consensus expectations, reaching 25.9% of both FY14 estimates respectively. The company posted revenue of MYR65.4m, up 18.7% y-oy. This was contributed by a higher sales volume on the back of higher production capacity. Correspondingly, its net profit surged 84.1% y-o-y, as further automation of its production lines enhanced production efficiency.
1-for-2 bonus issue. Karex also announced plans to undertake a bonus issue of up to 135.0m bonus shares on the basis of 1 new bonus share for every 2 existing shares in the company. The bonus issue, which will be fully capitalised from its share premium, will enlarge its share base to 405.0m from 270.0m currently. We believe that this exercise will improve trading liquidity. Based on its last closing price of MYR3.17, the theoretical share price will be adjusted to MYR2.11 , while our ex-bonus FV would be reduced to MYR2.34.
Risks. The key risks include: 1) volatility in raw material prices, and 11) foreign currency fluctuations.
Maintain BUY. We maintain our BUY call on the stock and bump up our FV to MYR3.51, based on a higher 20.0x target P/E on FY15 earnings, in line with our target valuation of 20.0x for Hartalega. In our opinion, Karex deserves to trade at a premium for its scarcity value, leadership in the condom manufacturing industry, backed by its increasing capacity, and stronger-than-expected institutional interest and participation.