Subscribe. Fair value: RM2.07. Initial Public Offering 21 October 2013 Karex Berhad. Set to Con-Dominate. Investment Highlights

Transcription

1 MALAYSIA INVESTMENT RESEARCH REPORT KDN PP13226/04/2013 (032022) JF Apex Securities Newsletter IPO Price Stock Data Board / Sector Post-IPO issued shares Post-IPO market cap (RM)* RM1.85* Main / Industrial 270m 499.5m Financial Forecast (RMm) 12A 13A 14F 15F Revenue Gross profit Operating profit Pretax profit Net profit EPS (sen)** PER (X)* Operating margin 9% 16.6% 16.5% 16.2% Net margin 6.4% 12.5% 12.6% 12.2% Revenue growth 3.9% 22.6% 27.7% 22.2% EPS growth 71.4% 142% 28.4% 18.2% Important Balance Sheet Items (pro-forma FY13) NA / share (RM) 0.66 Net Assets (RM) 178.5m Net Cash/(Debt) (RM) 14.7m Current Ratio (times) 1.81 Gearing (times) Net cash Debt/Asset (times) 0.37 * final IPO price will equal the lower of: i) the IPO price of RM1.85 per share and ii) the institutional price to be determined by way of bookbuilding. ** based on enlarged share cap. Important dates (tentative) JF APEX SECURITIES BERHAD (47680-X) Initial Public Offering 21 October 2013 Karex Berhad Set to Con-Dominate Investment Highlights Subscribe Fair value: RM2.07 The first of its kind Karex, the single largest condom manufacturer in the world would be the first condom manufacturer to be listed in Malaysia, seeking to raise RM75m from its IPO. The stock provides a good alternative to investors searching for proxy to the rubberrelated healthcare products in Malaysia as it shares similarities with other local listed rubber glove manufacturers in respect of: 1.) exposure to the fluctuation of rubber prices, 2.) export most of the products, and 3.) being in the industry in which demand growth is resilient. Robust industry growth Global sales of condom climbed at a CAGR of 7% from 2007 to 2011 while the industry growth is expected to accelerate to a rate of 7.5% in the coming years to achieve 30.4 bil pcs in The demand of condoms is expected to be supported by: 1.) the growing world population, which is projected to reach 8 billion in 2025, 2.) no substitution is more effective than condoms in preventing sexually transmitted diseases, and 3.) the maturing awareness and acceptance on the usage of condoms. Set to dominate Karex boasts an annual capacity of 3 bil pcs currently from its 4 plants in Malaysia and Thailand, making it the largest condom manufacturer in the world. Despite that, the Group is not resting on its laurels and is targeting to double the production volume to 6 bil pcs by 2015 in order to capture the growing demand of the market. The ambitious move would further consolidate its position by rendering its 20% of global market share by 2016 from an estimated 9% in Events Date Opening of retail offering 11 Oct 2013 Closing of Retail Offering 23 Oct 2013 Balloting of applications 25 Oct 2013 Allotment of the IPO shares 4 Nov 2013 Listing 6 Nov 2013 ( prospectus) Soong Wei Siang wssoong@jfapex.com.my (ext: 754) Overwhelming earnings growth FY2013 net profit jumped 141.7% yoy to RM29m from RM12m in FY2012. The overwhelming growth was achieved on the back of higher sales volume, while the easing of the latex price and higher production utilization expanded the earnings margins. Moving forward, we project a 3-year CAGR of 21% in its bottom line from FY2014F-FY2016F as the Group is embarking on an explosive capacity expansion, resulting economies of scale which shall improve cost efficiency and thus its competitiveness and profitability. License to roam The tender market commands 48% of the global condom market in 2012, and grew at a faster rate than the overall market in the last 5 years. Having ventured into the tender market since 1994, the Group has obtained numerous licenses and accreditation (refer Figure 6) that pre-qualify itself to market its products to NGOs, Please read carefully the important disclosures at end of this publication

2 international agencies and governments around the world with the segment contributed 36% to the Group total revenue in FY2013. On top of that, being the largest condom manufacturer in the world and its track record renders Karex the reputation and adequate capacity to cater to the large orders from the institutional buyers. Key Risks Susceptibility to gyrations in prices of raw materials, namely natural rubber. Exposed to foreign exchange (forex) risk. The lack of long term contract. Reliance on foreign labour. Recommendation Subscribe with a fair value of RM Our fair value is derived by pegging 15x PER to its FY2014F EPS of 13.8 sen. The valuation applied is a 10% discount to the valuation we ascribed to Top Glove (16.5x). Our fair value renders a potential upside of 12% from the IPO price. The rubber cousins - In our view, Karex shares similarity with Top Glove as both are the largest players in the rubber-related healthcare products in Malaysia by having the class-leading production capacity. However, we reckon that the lower valuation is justified in view of the relatively lower market capitalisation of Karex, and the Group has not fixed any dividend policy to reward its shareholders as compared to the 50% dividend payout ratio Top Glove is currently implementing. 2

3 Background Karex Industries Sdn. Bhd. was established in 1988 to manufacture high quality natural rubber latex condoms and other latex dipped products. As a leading condom manufacturer in Malaysia, the Group produces a full range of condom variants to meet the ever changing consumer demands. Karex has several state-of-the-art production plants in Malaysia and overseas manufacturing a wide range of condoms and other latex based medical disposables to cater to the worldwide market. Karex is managed by a team of highly qualified and experienced professionals throughout the years and have developed machine manufacturing capabilities which have given it the edge to build its own production plants. Figure 1: Group Structure Karex Berhad % % % % Karex Industries Sdn Bhd (KISB) Hevea Medical Sdn Bhd (HMSB) Innolatex Sdn Bhd (ISB) Innolatex (Thailand) Limited (ITL) % Uro Technology Sdn Bhd (UTSB) 3

4 Figure 2: Key Milestones Principal Activities The Group is principally involved in the manufacturing of the following products: a.) Condoms - Protection device most commonly used during sexual intercourse to reduce the possibility of pregnancy as well as the spreading of STIs and HIV. Contributed 90% to the Group total revenue in FY2013 Figure 3: Manufactured condom 4

5 b.) Catheters Flexible tube commonly made from silicone rubber or natural rubber that can be inserted into the urinary bladder creating a channel for the passage of fluid or for continuous irrigation of bladder. Contributed 5.1% of the total revenue in FY2013. Figure 4: Catheters c.) Probe covers and lubricating jelly The former is a type of hygienic protection for patients during ultrasonic examinations while the latter is used to reduce friction between body parts, or between body parts and other objects suitable for gynaecological use. Contributed 4.9% to Karex total revenue in FY2013. Figure 5: Probe covers and lubricating jelly 5

6 Distribution Channels Karex distributes its products via three channels, namely the commercial market, tender market and the Original Brand Manufacturer (OBM) market. i.) Commercial market Karex s core revenue contributor, contributed 60% to the Group total revenue in FY2013. Can be also known as Original Equipment Manufacturer (OEM), the products manufactured by Karex are sold to brand owner which will then marketed under their own brands in the commercial market. Well known customers include Reckitt Benckiser with the Durex brand and Ansell Limited under the Lifestyles brand. ii.) Tender market Supplying products under tender projects to international agencies, NGOs, and government. A tougher challenge as compared to the commercial markets due to stringent requirements and the supplier must be a pre-qualified manufacturer. Karex has secured tender projects from United Nation Population Fund, Population Service International from U.S. and Crown Agents from U.K. Tender market contributed 36% of the Group total revenue in FY2013. Figure 6: Key licenses and accreditations ISO 9001:2000 ISO 13485:2003 CMDCAS CE MARK SABS MARK US FDA 510k NF Mark CCC Mark BSI Kitemark iii.) OBM market Products are sold to distributors and traders under Karex s own brand. Brand name under Karex include Carex and INNO (condoms), CHROMA, UroCare ProCare (catheters). Karex has 75 distributors and traders in UAE, Hong Kong, India, Singapore, Bangladesh, South Africa and Nigeria. The OBM market contributed only 4% to the Group total revenue in FY

7 Revenue by Geography Figure 7: Revenue by geography Production Capacity Figure 8: Installed annual capacity Subsidiary companies Installed Annual Capacity (million pieces) Production Volume (million pieces) Utilisation Rate (%) KISB (Pontian) HMSB (Pontian) ISB (Klang) ITL (Thailand) Total - Karex A large chunk of Karex production capacity was derived from the two plants in Pontian, Johor. Karex Industries Sdn Bhd (KISB) has the largest production link, able to produce close to 2 billion pieces of condoms in a year, making up two-thirds of the Group s total capacity. The other plant in Pontian, Hevea Medical Sdn Bhd (HMSB) manufactures customised condoms, thus explains the lower than average utilisation rate. Moving forward, the Group is targeting to double its production capacity to 6 billion pieces per annum by

8 Cost breakdown Figure 9: Cost breakdown As shown in the figure above, cost of raw material prices is the major element in the manufacturing cost, contributing 71.5% of the total cost of goods sold in FY2012. Further breaking down the raw material costs; the latex or natural rubber is the biggest component in the raw material at 48.1%, followed by the foil, boxes and silicone oil. Following the efforts of automating its production line, the Group managed to reduce the labour costs by 6% in FY2012 as extra automated machines helped to reduce the numbers of labour in the manufacturing process. Top 5 condom manufacturer in the world Figure 10: Top 5 condom manufacturers in the world Name of Company Location Estimated Annual Production Capacity Karex Malaysia and Thailand 3 billion TTK-LIG Ltd. India 1.5 billion - 2 billion Thai Nippon Rubber Industry Co. Ltd. Thailand 2.0 billion HLL Lifecare Ltd. India 1.6 billion Suretex Ltd. Thailand 1.2 billion According to InfoBusiness, there are estimated 110 condom factories in operation globally. Most of the plants are located in close proximity to sources of raw materials, for simplified logistics and speedy delivery, and where labour costs are competitive. Karex is the largest condom manufacturer in the world by having 3 bil pcs of annual capacity, with the chasing packs playing catch up. 8

9 Future developments/plans Karex has identified four key areas to lay out its future plans: a.) Capacity expansion The Group intends to double its annual production capacity to 6 billion pieces from 3 billion pieces presently. To achieve the target, Karex has acquired a new factory in Port Klang while also bought a land in Pontian for the construction of new manufacturing plant. Elsewhere in Thailand, the Group plans to add new production lines and machineries in the existing factory. b.) Production line automation In order to improve its operating efficiency, the Group is looking to further automate its manufacturing process. On top of that, introduction of advanced production line reduces labour workforce thus provides better cost control for Karex, particularly following the implementation of minimum wage in Malaysia early c.) Greater emphasis on R&D for new products To fend off challenges from all over the world, the Group has pledged to be more innovative by increasing the existing range of products. More efforts will be spent on the R&D as the Group aims to produce thinner condoms and condoms using synthetic materials, introducing newly designed catheters and expanding the range of lubricating jelly. d.) Develop OBM market As OBM commands better profitability as compared to contract manufacturing or OEM, the Group intends to grow the OBM segment by venturing into new markets such as the South East Asian countries and India. It will leverage on the distributors and traders for the marketing of its products in the new market. 9

10 Risks Susceptibility to gyrations in prices of raw materials Being a traded commodity, the price of rubber is volatile as it fluctuates time by time as a result of speculative trading. Karex is exposed to substantial amount of risk as cost of raw materials stood at 66.6% of the Group s total cost of goods sold in FY2013 with latex or natural rubber the biggest component in the cost of raw material by contributing 42.8% of it. Figure 11: Natural rubber price (RM sen) Source: Bloomberg Exposed to foreign exchange (forex) risk A big part of the Group s sales revenue was denominated in foreign currency especially USD as it predominantly exports its product to the overseas market while raw material was purchased in local currency or Thai Baht. Despite hedging by buying forex contracts, the Group is still exposed to a certain amount of risk. The lack of long term contract The nature of contracts is more inclined to near-term rather than short-term, thus the Group does not have order book to show its earnings visibility. However, we understand that it is a common practice in the industry for the business to be transacted via purchase order instead of periodical contracts. Reliance on foreign labour Foreign labour stood more than half of the Group s labour workforce, any disruption of labour supply or revision in labour law could interrupt the manufacturing process or cause spike in labour costs. 10

11 Investment merits The First of its kind Karex, the single largest condom manufacturer in the world would be the first condom manufacturer to be listed in Malaysia, seeking to raise RM75m from its IPO. The stock provides a good alternative to investors searching for proxy to the rubber-related healthcare products in Malaysia as it shares similarities with other local listed rubber gloves manufacturers in respect of: 1.) exposure to the fluctuation of rubber prices, 2.) export most of the products, 3.) being in the industry in which demand growth is resilient. Robust industry growth Global sales of condom climbed at a CAGR of 7% to 21.2 bil pcs in 2011 from 16.2 bil pcs in 2007 while the industry growth is expected to accelerate to a rate of 7.5% in the coming years to achieve 30.4 bil pcs in The demand of condoms is expected to increase in tandem with the growing world population, which is projected to reach 8 billion in Besides, the demand growth is sustainable as no substitution is more effective than condoms in preventing sexually transmitted diseases. On top of that, the maturing awareness and acceptance on the usage of condoms can be also view as a support factor in the condom industry. Figure 12: Industry growth Source: Prospectus, JF Apex Set to dominate Karex boasts an annual capacity of 3 bil pcs currently from its 4 plants in Malaysia and Thailand, making it the largest condom manufacturer in the world. Despite that, the Group is not resting on its laurels and is targeting to double the production volume to 6 bil pcs by 2015 in order to capture the growing demand of the market. The ambitious move would further consolidate its position by rendering it 20% of global market share by 2016 from an estimated 9% in 2012 while the resulting economies of scale should improve cost efficiency and thus its competitiveness. Overwhelming earnings growth FY2013 net profit jumped 141.7% yoy to RM29m from RM12m in FY2012. The overwhelming growth was achieved on the back of higher sales volume, which grew 24.3% yoy, while the easing of the latex price and higher production utilization expanded the operating margin to 25.9% in FY2013 from 17.4% in FY2012. Moving forward, we project a CAGR of 21% in its bottom line for the next 3 years as the Group is embarking on an explosive capacity expansion, while the resulting economies of scale should improve cost efficiency and thus its competitiveness and profitability. License to roam The tender market commands 48% of the global condom market in 2012, and grew at a faster rate than the overall market in the last 5 years as governments are allocating more expenditure on condoms in order to prevent the spreading of STI, HIV or AIDS. Having ventured into the tender market in 1994, the Group has obtained numerous licenses and accreditation (refer Figure 6) that pre-qualify itself to market its products to NGOs, international agencies and governments around the world with the segment contributed 36% to the Group total revenue in FY2013. On top of that, being the largest condom manufacturer in the world and its track record renders Karex the reputation and adequate capacity to cater to the large orders from the institutional buyers. 11

12 Financial Review & Outlook Uninterrupted revenue growth The Group was able to record positive revenue growth for three consecutive years from RM157.4m in FY2010 to RM231.4m in FY2013, representing CAGR of 13.7%. The growth was achieved on the back of robust demand growth in the condom industry, while the Group has also expanded its production capacity as well as improved its efficiency in order to capture the additional demand. Moving forward, we expect the Group s top line to breach the RM400m level in FY2016F, following its expansion plan to drive its annual capacity to 6 billion pieces by Figure 13: Revenue FY2010-FY2016F (RM m), JF Apex Overwhelming FY2013 FY2013 net profit jumped 141.7% yoy to RM29m from RM12m in FY2012. The overwhelming growth was achieved on the back of higher sales volume, which grew 24.3% yoy, while the easing of the latex price and higher production utilization expanded the operating margin to 25.9% in FY2013 from 17.4% in FY2012. Moving forward, we project a CAGR of 21% in its bottom line for the next 3 years from FY2014F-FY2016F as the Group is embarking on an explosive capacity expansion, resulting economies of scale which shall improve cost efficiency and thus its competitiveness and profitability. Figure 14: Net profit FY2010-FY2016F (RM m), JF Apex 12

13 Figure 15: Financial summary FYE 30 June (RM'm) FY2011 FY2012 FY2013 FY2014F FY2015F FY2016F Revenue Gross profit Operating profit/ebit Pre-tax profit Net profit EPS (RM) PE (x) Gross margin 13.7% 17.4% 25.9% 24.5% 23.3% 22.3% Net margin 3.9% 6.4% 12.5% 12.6% 12.2% 11.9% Revenue growth 15.5% 3.9% 22.6% 27.7% 22.2% 19.2% Net profit growth -57.6% 71.4% 141.7% 28.4% 18.2% 16.7% Key assumptions Capacity (million pcs) Utilisation rate 65.1% 80.9% 77.0% 75.0% 74.0% Sales volume ASP (sen) Volume growth 24.3% 27.3% 21.8% 18.4%, JF Apex Utilisation of proceeds Figure 16: Utilisation of proceeds Description Estimated timeframe upon listing Amount (RM million) % of total gross proceeds Research and development Within 36 months Capital Expenditure Within 36 months Working Capital Within 36 months Repayment of bank borrowings Within 6 months Estimated listing fees and expenses Within 6 months Total gross proceeds

14 Valuation and Recommendation Subscribe with a fair value of RM Our fair value is derived by pegging 15x PER to its FY2014F EPS of 13.8sen. The valuation applied is a 10% discount to the valuation we ascribed to Top Glove (16.5x). Our fair value renders a potential upside of 12% from the IPO price. The rubber cousins - In our view, Karex shares similarity with Top Glove as both are the largest players in the rubber products industry in Malaysia by having the class-leading production capacity. However, we reckon that the lower valuation is justified in view of the relatively lower market capitalisation of Karex, and the Group has not fixed any dividend policy to reward its shareholders as compared to the 50% dividend payout ratio Top Glove is currently implementing. Figure 17: Peers comparison Price Market ROE P/B 16-Oct cap PE (x) (%) (x) Company (RM) (RM m) Historical Current Forward Karex 1.85 (IPO) % 2.80 Rubber gloves manufacturer Top Glove , % 2.64 Hartalega , % 7.04 Kossan* , % 3.55 Supermax 2.5 1, % 2.03 Average % 3.82 Condom manufacturer Ansell Ltd* % 3.19 Church & Dwight Co Inc* , % 4.16 Reckitt Benckiser Group* , % 5.23 Average % 4.2 *based on consensus estimates, Bloomberg, JF Apex 14

15 JF APEX SECURITIES BERHAD CONTACT LIST JF APEX SECURITIES BHD Head Office: 6 th Floor, Menara Apex Off Jalan Semenyih Bukit Mewah Kajang Selangor Darul Ehsan Malaysia General Line: (603) Facsimile: (603) PJ Office: 15 th Floor, Menara Choy Fook On No. 1B, Jalan Yong Shook Lin Petaling Jaya Selangor Darul Ehsan Malaysia General Line: (603) Facsimile: (603) DEALING TEAM Head Office: Kong Ming Ming (ext 3237) Shirley Chang (ext 3211) Norisam Bojo (ext 3233) Wong Wing Haur, Alvin (ext 3226) Institutional Dealing Team: Lim Teck Seng Sanusi Bin Mansor (ext 740) Fathul Rahman Buyong (ext 741) Ahmad Mansor (ext 744) Lum Meng Chan (ext 743) Zairul Azman (ext 746) PJ Office: Mervyn Wong (ext 363) Mohd Hanif Wan Said (ext 111) Fong Jia Wen (ext 822) Nursyazaleen Hazwani (ext 362) RESEARCH TEAM Head Office: Lee Chung Cheng (ext 758) Lee Cherng Wee (ext 759) Jessica Low Jze Tieng (ext 756) Soong Wei Siang (ext 754) Gabriela Fang Minn Fern (ext 753) Elliya Harisna binti Junaedi (ext 752) JF APEX SECURITIES - RESEARCH RECOMMENDATION FRAMEWORK STOCK RECOMMENDATIONS BUY : The stock s total returns* are expected to exceed 10% within the next 12 months. HOLD : The stock s total returns* are expected to be within +10% to 10% within the next 12 months. SELL : The stock s total returns* are expected to be below -10% within the next 12 months. TRADING BUY : The stock s total returns* are expected to exceed 10% within the next 3 months. TRADING SELL : The stock s total returns* are expected to be below -10% within the next 3 months. SECTOR RECOMMENDATIONS OVERWEIGHT : The industry as defined by the analyst is expected to exceed 10% within the next 12 months. MARKETWEIGHT : The industry as defined by the analyst is expected to be within +10% to 10% within the next 12 months. UNDERWEIGHT : The industry as defined by the analyst is expected to be below -10% within the next 12 months. *capital gain + dividend yield JF APEX SECURITIES BERHAD - DISCLAIMER Disclaimer: The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of JF Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report. Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of JF Apex Securities Berhad and are subject to change without notice. JF Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. JF Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against JF Apex Securities Berhad. JF Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of JF Apex Securities Berhad. Published & Printed By: JF Apex Securities Berhad (47680-X) (A Participating Organisation of Bursa Malaysia Securities Berhad) 15