Malaysia-listed Karex, the world’s largest maker of condoms, is taking a hit from the rise in the ringgit.
CIMB noted that core net profit of 7.6 million ringgit for the first-half of fiscal 2018 was “grossly below” its estimated, coming in at only 27 percent of the full-fiscal-year forecast.
The brokerage attributed the miss to the stronger ringgit, depressed average selling prices in tender markets and higher operating expenses.
“While we expect average selling prices (ASPs) to improve in the second half of fiscal 2018, we are wary of the ringgit’s recent strengthening against the U.S. dollar,” CIMB said. “We believe the strong ringgit environment may lead to further margin compression until Karex is able to raise ASPs again.”
CIMB cut its fiscal 2018-20 earnings per share forecasts by 44.9-46.9 percent, saying the outlook remains weak in the near term. That slashed its target price to 0.78 ringgit from 1.44 ringgit.
Downgraded to Reduce
The brokerage downgraded the stock to Reduce from Hold.
Affin Hwang Capital, which has a tie-up with Daiwa, was also negative on the stock.
“Although demand for the tender market has improved, sales have failed to keep up with the rising production costs, as overcapacity remains an issue for the industry,” Affin Hwang said in a note on Thursday.
It also noted that Karex’s costs will keep going up.
”Although we agree on management’s strategy to diversify into the higher margin OBM segment, it will take some time before they are able to reap the benefits,” the note said, adding it didn’t expect cost increases to normalise anytime soon.
It cut its target price to 0.80 ringgit from 1.30 ringgit after lowering revenue and margin assumptions; it kept a Sell call.
The stock was down 1.67 percent at 0.885 ringgit at 12:26 P.M. SGT.