Affin Hwang Capital Research continues to like Karex
KUALA LUMPUR: Affin Hwang Capital Research continues to like Karex’s long-term value proposition as one of the top manufacturers in a growing condom market, with a strategy to extract further value from its budding brands.
However, the roadmap to expand its original brand manufacturing (OBM) segment is strewn with challenges while profit margins are likely to remain uninspiring in the interim, said the research house on Monday.
“We remain cautious on Karex’s near-term outlook and await clearer earnings visibility. Maintain Hold with a reduced target price of RM1.60,” it said.
Affin Hwang Research said eespite the disappointing share-price performance year-to-date, it believes that Karex’s long-term investment thesis remains unchanged.
“The condom market is expected to continue to grow in tandem with the increase in world population as well as the positive shift in perception towards its use.
“Meanwhile, Karex remains the largest and one of the most competitive condom manufacturers in the world, and is looking to extract further value by building its own brands,” it said.
The research house said as the expansion in its OBM segment gains traction, Karex’s distribution and administrative costs have also significantly increased.
Coupled with a weaker tender market due to funding constraints as well as stiffer industry competition, Karex has seen a sharp contraction in its net profit margin in recent quarters.
“Moving forward, we believe that challenges remain for the OBM segment and the associated costs could remain high for a longer period of time.
“While we believe that Karex’s long-term value proposition remains, pressure on profit margins are likely to persist in the short term.
“As such, we further lower our earnings forecasts for FY18-19 by 23-39%. We remain cautious on Karex’s near-term outlook and await clearer earnings visibility,” it said.
Affin Hwang Research maintained its Hold recommendation with a reduced discounted cashflow-derived 12-month target price of RM1.60.
“Our target price is at an implied price-to-earnings ratio (PER) of 28 times CY18E EPS,” it said.
It pointed out the key upside risks include: i) stronger-than-expected recovery in tender markets; ii) cost-effective OBM marketing; and iii) successful positioning of condom brands.
Key downside risks include: i) Prolonged weakness in tender orders and/or pricing; and ii) failure to gain traction in OBM markets.
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