Better year ahead for Karex
Rebound in volume from tender and OBM segments to boost profit
PETALING JAYA: Condom and rubber product manufacturer Karex Bhd is expected to see a rebound in its earnings in the financial year (FY) ended June 30, 2018, after seeing its bottom line contracted in FY17.
According to RHB Research Institute, Karex’s expected earnings recovery in the year ahead would likely be supported by a rebound in the volume from the tender segment and contribution from its original brand manufacturing (OBM) expansion.
“We expect Karex’s earnings to recover in FY18 as the price war in the tender segment has slowly eased, while contribution from the OBM segment is rising,” RHB Research wrote in a report.
The brokerage upgraded its recommendation on Karex to “buy” from neutral, citing the share price correction of the counter over the past year had resulted in attractive valuations.
Nevertheless, RHB Research ascribed a lower target price of RM1.80, compared with RM2.11 previously, for Karex, after inputting a lower earnings forecast.
“We cut our FY 18F-20F earnings by 13%-14% after trimming our margin assumptions,” the brokerage explained, noting that its target price for Karex implied a valuation of 29 times estimated price-earnings (P/E) for FY18, which was equivalent to the company’s threeyear historical average, and above that of its peers at 21 times.
RHB Research said the above - peer average P/E for Karex was justified, given the company’s decent prospective three-year earnings compounded annual growth rate of 41%, and its status as the world’s largest condom manufacturer by capacity.
Karex’s shares had been under heavy selling pressure in the last three months as sentiment was weighed down by a lacklustre earnings outlook for FY17.
The counter fell five sen to close at RM1.41 on Wednesday after reporting below-expectations earnings for FY17 a day earlier.
Year to date, Karex’s shares had lost 40.25%.
Meanwhile, CIMB Research said the worst was likely over for Karex.
“Despite a weak near-term outlook, Karex’s market positioning as the largest condom maker globally and growing OBM exposure should support current valuations. We would turn more positive on stronger-than-expected tender marker volumes and/or decline in OBM expenses,” the brokerage said.
CIMB Research had lowered its earnings estimates for Karex by 16.5%-17.1% for FY18-FY19 to account for a weaker-than-expected recovery in average selling prices (ASP) and higher operating expenses.
Despite lowering its earnings estimates for Karex, CIMB Research said it still expected Karex to record a 35.2% year-on-year increase in net profit.
“This should be backed by improvement in ASP in the tender segment due to weaker competition, higher contribution from the OBM segment and more stable latex prices,” CIMB Research said.
The brokerage upgraded its call on Karex to “hold” from reduce, with a lower target price of RM1.40 from RM1.70 previously based on an unchanged valuation of 28 times 2018 P/E.
Meanwhile, Affin Hwang Capital Research was not as optimistic.
“We expect overall margins for FY18 to recover on the back of a gradually recovering tender market and increased contributions from the OBM segment. However, we remain cautious on its outlook as significant uncertainties remain in tender budgets and lingering effects from higher raw material prices may spill over to the first quarter of FY18,” Affin Hwang said, adding that elevated distribution and administrative expenses would further put pressure on margins.
Affin Hwang downgraded Karex to “sell”, citing the company’s nearterm earnings visibility remained clouded. It also lowered its target price for the company to RM1.30 from RM1.60 previously.
A Bloomberg poll showed there were only one “buy” call on Karex, against five “hold” and three “sell” calls, with a median target price of RM1.56 for the counter.
Karex saw its FY17 net profit fall 58% to RM 27.95mil from RM 66.69mil in the preceding year due to higher operating expenses, especially in the OBM segment, increase in latex raw material prices and stiff competition in the tender segment, which put pressure on margins.
Consequently, the group saw its earnings per share fall to 2.79 sen in FY17 from 6.65 sen previously.