Thursday, 7 November 2013

Listing to solidify Karex’s position as market leader

by Ronnie Teo, Posted on October 23, 2013, Wednesday

KUCHING: The upcoming listing of Karex Bhd (Karex) on the main bourse of Bursa Malaysia will see the group garnering an approximate market capitalisation of RM635 million, based on RM2.35 per share.

According to analyst Kevin Wong from HwangDBS Vickers Research Sdn Bhd (HwangDBS Research), this was on the back of the group already coveting about 10 per cent of global market share.

“Karex is expanding production capacity from three billion to six billion pieces by the end of 2015,” Wong outlined in HwangDBS Research’s initiation coverage report. “This could boost the group’s earnings, supported by a large global market for condoms (circa 23 billion pieces in 2012), with global demand expected to increase annually and reach 30.4 billion pieces by 2016.”

Owned by the Goh family, Karex has been running the condom manufacturing business since late 1980’s. Condom sales contribute about 90 per cent of group revenues, which is derived from three principal markets: commercial (60 per cent of FY13 condom sales), tender (36 per cent) and own brand manufacturing (four per cent).

Currently, it has three plants in Klang, Pontian and Hat Yai (Thailand) with a total manufacturing capacity of three billion pieces per annum, or 10.5 per cent of global condom output in 2012.

Goh noted that the higher consumption of condoms will largely be driven by ongoing efforts and procurement by governments or non-government organisations (NGOs) to curb sexually transmitted diseases and support family planning initiatives in tandem with steady global population growth.

“Condoms are generally demand inelastic, and have little correlation with GDP growth or consumer purchasing power because they are considered an essential and are small ticket items. We forecast 2-year net profit CAGR of 29 per cent premised on rising output from 2.4 billion pieces in FY13 to 3.6 billion pieces in FY15.”

Meanwhile, RHB Research Institute Sdn Bhd (RHB Research) said the listing will solidify Karex’s position as the world’s largest condom maker, as well as widen the gap between the company and its closest global competitor, Thai Nippon Rubber Industry Co Ltd, by two billion pieces.

“There will also be more growth opportunities in tender market. Due to limited government funding for family planning in some developing countries, organisations such as the United Nations Population Fund (UNFPA) and United States Agency for Development (USAID) have started programmes to distribute condoms free of charge or at subsidised cost,” RHB Research outlined.

“This would likely benefit Karex as UNFPA and USAID are established customers. We also expect more potential contracts in the pipeline.”

RHB Research estimated core earnings for financial years 2013 (FY13) to FY15 forecasts compound annual growth rate (CAGR) earnings of 28.3 per cent, with revenue forecasted to reach RM289 million in FY14F from RM339 million in FY15F.

“Given the better economies of scale and an improving customer mix, we expect the company’s net margin to widen to 13.6 per cent in FY14F from 12.5 per cent in FY13,” it added. “We forecast core earnings of RM39.5 million and RM47.8 million for FY14F and FY15F respectively.”

After initiating coverage, RHB Research valued Karex at RM2.59 per share, based on a target 16 times of the price to earnings ratio (P/E) for calendar year 2014 (CY14).

Meanwhile, HwangDBS Research pegged a fair value of RM2.35 per share for Karex, based on a 0.5 times CY14 P/E to growth ratio, which is the firm’s preferred valuation method to capture Karex’s robust future growth potential.

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