Karex Berhad: SELL

Karex Berhad
Research

General information
27 years experience in this industry
World's largest manufacturer
Global condom market year 2015 = RM27 billion
Capacity increase from 4 billion to 5 billion
Net cash position
Private placement RM158 million on March 2015

Positive
Target to increase capacity to 7 billion in 2017 (40% increase of capacity from current production)

Finance Background
Gross profit margin = 33% to 39%
Distribution expenses = 5.0% (year 2014) to 5.5% (year 2016) - getting worse
Administrative expenses from 4.5% (year 2014) to 11.0% (year 2016) - getting very worse
Net profit, exclude currency gain/loss and others gain/loss will be normalised at around 16%

Annually revenue for year 2016 (estimation) will be RM340 million

Assume net profit margin 16%, exclude any extra gain/loss, then profit shall be RM54.4 million

Outstanding shares = around 1 billion

EPS = 54.4/1000 = 5.44 cents

Assume 40% increase in profit (in line with increment with capacity production)

EPS @ 2017 = 5.44 cents x 1.4
= 7.62 cents

Give high PE ratio 20 for this industry, target price is RM1.52

Current share price RM2.26, which is over price.

If consider margin of safety, you shall get in at PE = 15, which give you the entry price of RM1.14 (provided this company still in high grow path)

Note* Even Warren Buffett bought Coca-Cola Company when it is trading at around PE 15. So do you think current price have any buffer zone for margin of safety? (which is twice the price of PE15). You judge it yourself. Buy or sell at your own risk.

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