TA Securities said due to the lack of pure listed condom
manufacturers, they base their valuation on their targeted glove industry PE
ratio of 14x. They give Karex fair value at RM2.40 per share based on a 25% premium
to their targeted PE multiple. Incorporating proceeds from capital gains and dividend
yield, this translates into a total return of 31.9%. They believe their PE
multiple is justified given the following arguments: 1) Largest condom
manufacturer in the world; 2) Aggressive expansion plans to double capacity
within three years; and 3) Access to key licenses and accreditations to export
products across 110 countries. Nevertheless, key threats include: 1) Inability
to fully utilize incoming capacity; 2) Delays in construction of new facilities
and 3) Fluctuations in currency exchange rates and material prices.
2014 Karex dividend yield is about RM2.2%, assuming a 30%
payout ratio. Currently management does not have any Karex payout ratio policy.
TA Securities initiate coverage on Karex with a target price of RM2.40 per share. They like the group for its aggressive expansion plan to double capacity to 6.0bn pieces of condoms/annum by 2015. Assuming a utilization rate of 70% and average selling prices (ASPs) of 3 cents (9.6 sen) per condom, the additional capacity will boost revenue by RM201.6mn once completed (FY13: RM231.4mn).
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JFApex Research is recommending that investors subscribe to condom-maker Karex’s IPO, which is priced at RM1.85, saying it has determined fair valuation for the stock at RM2.07.
The retail offering of the IPO opened on Oct 11 and will close on Oct 23, with allotment of the IPO shares to be done on Nov 4.
The research house says the world’s largest condom manufacturer, which is seeking to raise RM75m from its IPO, provides a good alternative to investors searching for a proxy to the rubber-related healthcare products in Malaysia.
Like other local-listed rubber glove manufacturers, Karex is 1) exposed to the fluctuation of rubber prices, 2) exports most of its products, and 3) is in an industry in which demand growth remains resilient.
According to JF Apex, Karex has enjoyed overwhelming earnings growth, with FY2013 net profit jumping 141.7% year-on-year to RM29mil from RM12mil, on the back of higher sales volume as well as higher margins from easing latex prices and higher production utilisation.
“Moving forward, we project a three-year CAGR (compound annual growth rate) of 21% in its bottom line from FY2014F-FY2016F as the group is embarking on an explosive capacity expansion, resulting in economies of scale which shall improve cost efficiency and thus its competitiveness and profitability,” the research house says.
It also notes Karex’s share of business from the tender market (NGOs, international agencies and governments), which contributes 36% of total revenue.
JF Apex says its fair valuation of RM2.07 is derived by pegging 15 times price-earnings ratio to Karex’s FY2014 forecast earning-per-share of 13.8 sen.
“The valuation applied is a 10% discount to the valuation we ascribed to Top Glove (16.5 times). Our fair value renders a potential upside of 12% from the IPO price.
“Karex shares similarity with Top Glove as both are the largest players in the rubber-related healthcare products in Malaysia by having the class-leading production capacity. However, we reckon that the lower valuation is justified in view of the relatively lower market capitalisation of Karex, and the Group has not fixed any dividend policy to reward its shareholders as compared to the 50% dividend payout ratio Top Glove is currently implementing,” it concludes.
The retail offering of the IPO opened on Oct 11 and will close on Oct 23, with allotment of the IPO shares to be done on Nov 4.
The research house says the world’s largest condom manufacturer, which is seeking to raise RM75m from its IPO, provides a good alternative to investors searching for a proxy to the rubber-related healthcare products in Malaysia.
Like other local-listed rubber glove manufacturers, Karex is 1) exposed to the fluctuation of rubber prices, 2) exports most of its products, and 3) is in an industry in which demand growth remains resilient.
According to JF Apex, Karex has enjoyed overwhelming earnings growth, with FY2013 net profit jumping 141.7% year-on-year to RM29mil from RM12mil, on the back of higher sales volume as well as higher margins from easing latex prices and higher production utilisation.
“Moving forward, we project a three-year CAGR (compound annual growth rate) of 21% in its bottom line from FY2014F-FY2016F as the group is embarking on an explosive capacity expansion, resulting in economies of scale which shall improve cost efficiency and thus its competitiveness and profitability,” the research house says.
It also notes Karex’s share of business from the tender market (NGOs, international agencies and governments), which contributes 36% of total revenue.
JF Apex says its fair valuation of RM2.07 is derived by pegging 15 times price-earnings ratio to Karex’s FY2014 forecast earning-per-share of 13.8 sen.
“The valuation applied is a 10% discount to the valuation we ascribed to Top Glove (16.5 times). Our fair value renders a potential upside of 12% from the IPO price.
“Karex shares similarity with Top Glove as both are the largest players in the rubber-related healthcare products in Malaysia by having the class-leading production capacity. However, we reckon that the lower valuation is justified in view of the relatively lower market capitalisation of Karex, and the Group has not fixed any dividend policy to reward its shareholders as compared to the 50% dividend payout ratio Top Glove is currently implementing,” it concludes.
