Tuesday 25 February 2014

How Much Is Karex Worth?

Since its debut on 6th Nov 2013, Karex's share price has appreciated 132% in 4 months time to RM4.30 from IPO price of RM1.85.

Its proposed bonus issue soon after listing day might have fueled the rally to some extent.

By the way, it seems like Karex is not going to stop here. Both RHB and CIMB have revised their target price higher to the region of RM5.10.

If Karex Bhd had existed since 2012 (before IPO), its revenue and PAT for the 6 months ended Dec 2013 would be RM147.6mil & RM21.4mil respectively, compared to RM118.7mil & RM14.6mil for corresponding period of previous year.

This represents a 25% rise in revenue and an impressive 47% rise in net profit YoY.

It is expected that both revenue and profit will continue to rise further in tandem with Karex's on-track expansion plan.

From its IPO prospectus in 2013, Karex already has a capacity of 3 billion pieces of condom per year. The management plans to double its capacity by 2015, in which it will increase the capacity by 1 billion a year.

According to latest analyst's report, Karex has already achieved 4 billion in early 2014 and is on track to hit 5 billion pieces by the end of year 2014.

Four new lines with 100 million pieces capacity each line have been successfully installed in FY14Q1 (Jul-Sep 2013) and have contributed fully to its FY14Q2 earning.

Another 6 new lines have just started operation for the past few months and they are expected to further improve Karex's financial result in the second half of FY2014.

So, a total of 10 new production lines with total 1 billion capacity are up and running since mid 2013.

For July-Dec13, Karex achieves RM21.4mil net profit mainly from a capacity of 3 to 4 billion utilized at around 80%. 

If this trend continues, I think Karex will have no problem to bag RM45mil PAT for its FY2014 ended Jun 2014.

With an outstanding shares at 270mil, estimated EPS is 16.7sen and fair value should be RM2.50 if PE of 15x is given due to its growing mode.

However, analysts give Karex a PE close to 20x and use forecast earning in between FY15-16 to come to their target prices. That's why their target price is above RM5.

If Karex achieves a capacity of 6 billion in end of CY2015 (50% increase from 4 billion) with profit margin and utilization rate stay the same, its PAT may be able to reach RM70mil (50% increase from RM45mil) in FY2016 ended June 2016.

Thus, projected EPS in FY16 is 25.9sen, and target price is RM3.90 if PE is 15x.

Can Karex's utilization rate remain at 80% after it has doubled its capacity? Well, the management guided that the delivery lead time is at 4 months now (target below 2 months) and the company still has many pending orders. It seems possible.

For me, Karex's share is worth RM2.50 now and might worth RM3.90 in June 2016, but now it is trading at RM4.25. 

Year 2016 seems too far away and anything can happen within those 3 years.

Anyway, all these are just rough estimate only.

I believe Karex's share price will trend upwards until the bonus issues are ex-ed, and then it will go up and up again as long as it can produce good quarterly financial results.

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