Karex continues to benefit in the current uncertain market
environment since its earnings profile exhibits both resilience
and growth. We maintain our BUY recommendation with a higher TP of
MYR4.66 (15% upside, 22x CY16F P/E) from MYR3.89 previously.
Karex could also further benefit from subdued cost factors and a
stronger USD.
Attractive earnings profile. Amidst the uncertain market environment, Karex offers exposure through its safe-haven earnings profile that exhibits both resilience, due to the association with the healthcare sectorand growth characteristics on the back of aggressive capacity-led earnings expansion. Management guided to an increase in annual capacity by an average of 18.3% (from 5bn to 7bn pieces) over the next two FYs, which translates into a 2-year earnings CAGR of approximately 21.9%.
Macro-economic themes. In the recently revised 2015 Budget, the Malaysian Government announced the postponement of scheduled gas and electricity tariff hikes for 2015. Combined, both make up roughly 7% of Karex’s total production cost. We have also revised our USD/MYR assumption for 2015 to MYR3.50 (from MYR3.30). Our combined revised assumptions for energy cost and FX result in a 2.0/2.1% upward revision in FY15F (Jun)/FY16F earnings to MYR61.3m and MYR80.5m respectively.
Risks. A surge in raw material prices and a weakening of the USD couldhurt margins.
Maintain BUY. We believe that Karex, much like the rubber glove manufacturers, will continue to benefit from its earnings profile that exhibits both resilience and growth amidst the uncertain market environment. We maintain our BUY recommendation with a revised TP of MYR4.66 from MYR3.89 previously. In addition to revising the earnings forecast, we roll forward our base year to FY16F to reflect forward growth expectations and peg Karex’s earnings to 22x FY16F P/E (from 20x previously). This is in line with the average of its historical trading band since IPO in Oct 2013. We think this is justified due to Karex’s sector leadership and its potential 2-year forward earnings CAGR of 21.9%.
Macro-economic themes
Prices of raw materials and latex remain subdued. We expect the weaker demand and stronger supply situation in the rubber market to persist, thus keeping prices of natural latex low. Unlike the rubber glove manufacturers, which Karex is often compared with, Karex does not have a cost savings sharing arrangement with itsclients. Therefore, cost savings from downward movements in raw material prices will contribute directly to Karex’s bottomline.
The stronger USD relative to MYR is a boon to Karex as revenue will beproportionally more sensitive to the USD relative to cost. >90% of revenue is denominated in the USD while ~65% of cost is denominated in MYR. The USD has strengthened 7.3% against the MYR since Dec 2014.
Source: RHB
Attractive earnings profile. Amidst the uncertain market environment, Karex offers exposure through its safe-haven earnings profile that exhibits both resilience, due to the association with the healthcare sectorand growth characteristics on the back of aggressive capacity-led earnings expansion. Management guided to an increase in annual capacity by an average of 18.3% (from 5bn to 7bn pieces) over the next two FYs, which translates into a 2-year earnings CAGR of approximately 21.9%.
Macro-economic themes. In the recently revised 2015 Budget, the Malaysian Government announced the postponement of scheduled gas and electricity tariff hikes for 2015. Combined, both make up roughly 7% of Karex’s total production cost. We have also revised our USD/MYR assumption for 2015 to MYR3.50 (from MYR3.30). Our combined revised assumptions for energy cost and FX result in a 2.0/2.1% upward revision in FY15F (Jun)/FY16F earnings to MYR61.3m and MYR80.5m respectively.
Risks. A surge in raw material prices and a weakening of the USD couldhurt margins.
Maintain BUY. We believe that Karex, much like the rubber glove manufacturers, will continue to benefit from its earnings profile that exhibits both resilience and growth amidst the uncertain market environment. We maintain our BUY recommendation with a revised TP of MYR4.66 from MYR3.89 previously. In addition to revising the earnings forecast, we roll forward our base year to FY16F to reflect forward growth expectations and peg Karex’s earnings to 22x FY16F P/E (from 20x previously). This is in line with the average of its historical trading band since IPO in Oct 2013. We think this is justified due to Karex’s sector leadership and its potential 2-year forward earnings CAGR of 21.9%.
Macro-economic themes
Prices of raw materials and latex remain subdued. We expect the weaker demand and stronger supply situation in the rubber market to persist, thus keeping prices of natural latex low. Unlike the rubber glove manufacturers, which Karex is often compared with, Karex does not have a cost savings sharing arrangement with itsclients. Therefore, cost savings from downward movements in raw material prices will contribute directly to Karex’s bottomline.
The stronger USD relative to MYR is a boon to Karex as revenue will beproportionally more sensitive to the USD relative to cost. >90% of revenue is denominated in the USD while ~65% of cost is denominated in MYR. The USD has strengthened 7.3% against the MYR since Dec 2014.
Source: RHB
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