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Tuesday, February 21, 2017

Research house sees flat Q2 results for Karex

Tuesday, 21 February 2017

Underperforming: The research house expects higher marketing expenses to be a recurring theme for the next few quarters as Karex continues to scale up its OBM segment.

PETALING JAYA: Karex Bhd’s second quarter results for financial year 2017 is expected to be flat on the back of higher ramp-up costs in its own-brand manufacturing (OBM) segment.

Affin Hwang Capital Research said it expected the quarter’s core earnings to range from RM7mil to RM9mil after taking into account higher listing fees for product placements, marketing expenses for brand awareness improvements and raw material prices due to the rally in natural rubber price.

“The first half of this year is likely to underperform both our earnings estimates and consensus forecasts, which explains our latest earnings cuts.

“We expect higher marketing expenses to be a recurring theme for the next few quarters as Karex continues to scale up its OBM segment in new market launches, which could pressure earnings growth,” it said.

The research house is maintaining its “hold” stance on the stock despite weakening earnings profile ahead, as its transition to an OBM hybrid manufacturer could yield significant margin improvement once its OBM gains sufficient scale and market share.

Karex, the world’s largest condom manufacturer, is scheduled to release its second quarter results this Friday.

Overall, the brokerage expected sequential topline improvement underpinned by recovery in the tender segment as well as consolidation of recent acquisitions (Pasante).

Recall, the first quarter revenue growth disappointed due to the delay in delivery of both tender and commercial orders valued at about RM13mil.

Affin Hwang Capital expected the said amount to be recognised in the seond quarter pursuant to the third party verification of the finished goods.

Commercial orders should be firmer sequentially, but that was largely due to seasonality, it noted, adding that the ramp-up in the OBM segment remained ongoing, although it was unlikely to contribute significantly in the near-term due to its low-base (13%).

Towards this end, the research house has trimmed its discounted cash flow derived target price to RM2.30 after incorporating its earnings cut.


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