World’s largest maker of condoms Karex still too expensive: Affin Hwang

Malaysia ringgit notesMalaysia ringgit notes

Shares of the world’s largest maker of condoms Karex are still trading at a demanding valuation despite the recent selloff, Affin Hwang Capital said.

“Although Karex was able to deliver record revenue in the recent quarter, driven by higher contributions from both the OBM and Tender segments, it was achieved by sacrificing on margins,” the brokerage, which has a tie-up with Daiwa, said in a note on Tuesday. It noted the gross margin fell to 26.7 percent from its historical levels around 31 percent.

Affin Hwang said it expected margins to remain under pressure, with a weak tender market and higher expenses as Malaysia-listed Karex taps new markets.

Karex shares are trading at 53 times fiscal 2018 price-to-earnings, it noted. It said it might seem reasonable when coupled with the two-year (2018-2020) earnings compound annual growth rate (CAGR) of 38 percent, but the brokerage pointed to a history of earnings misses since 2016.

“We think that Karex will take a further three to five years before its earnings recover to fiscal 2016 levels,” it said.

Affin Hwang kept a Sell call on the stock and cut its target price to 0.60 ringgit from 0.80 ringgit after cutting its fiscal 2018-2020 earnings per share forecasts by 1-19 percent to reflect the lower margins it estimated.