Karex (High Valuation But Bright Outlook)

At current (24 Feb 2014) share price, it is trading at a PER of nearly 26 times estimated earnings of rm45 million for financial year 2014 ending June 30. The market’s willingness to pay such premium valuation suggests that investors, by and large, hold a robust outlook for the company going forward.

Supported by ongoing capacity expansion plans, Karex will continue to deliver strong double digit earnings growth over the next two to three years from Feb 2014, which would justify its near term premium to the broader market’s average valuations.

The bulk of Karex’s products are exported.

Investors would likely to be patient to crystallize further gains

Karex is benefiting (Feb 2014 & Beyond) from a confluence of positive factors, including a strengthening of USD against the ringgit, falling latex prices, expansion in production capacity and steady demand growth for condoms globally.

Karex is the world larges condom market with production capacity of four billion pieces and about 10% market share.

Karex believes it has strong market positioning in an industry with relatively high barriers to entry. Condoms are regulated medical products with stringent quality requirements and Karex is a pre qualified manufacturer with all the licenses, certifications and accreditation required to supply over 110 countries.

Karex is also in the midst of expansion phase which will double to six billion pieces by 2016.

Total capex is estimate to about rm100 million which will be partly funded by proceeds from the IPO. It had raised about rm75 million and its controlling shareholders retain a 63% stake in the company.

It is also a beneficiary of the strengthening of USD. Export dominated in USD, accounts fro some 91% of its total sales in FY2013.

Meanwhile, among the major cost items, only vulcanized latex – which accounts for some 43% of total raw material costs in FY2013 – is purchased in USD.

Though the stock is not cheap relative to the broader market (25 Feb 2014) – and this may cap its near term upside gains. But the company is expected to enjoy strong growth rates going forward.

It is in a net cash position of rm46 million at end Dec 2013.

With strong cash flow and earnings growth, it can afford to pay small dividends since it its still in an expansionary phase.