World’s largest maker of condoms Karex cut to Underperform by Credit Suisse after earnings miss

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Credit Suisse downgraded the Karex to Underperform from Neutral after the world’s largest maker of condoms posted its worst-ever quarterly profit since listing.

“Although the share price is at an all-time low, we do not expect a swift earnings recovery, given the unfavourable outlook on forex and oil
prices,” Credit Suisse said in a note on Friday. “In addition, the company has disappointed for many quarters now and we believe investors will need to see a sustainable turnaround before regaining confidence.”

It noted Karex reported fiscal third-quarter net profit of 1 million ringgit, down 82 percent on-year, while net margin was only 1.1 percent, down from the around 20 percent seen in 2015, which management attributed to unfavorable forex moves and rising commodity prices. Fiscal nine-month profit fell 65 percent on-year to only 22 percent of consensus full-year forecasts, it said.

“All key segments have shown positive trends, but macro variables have been less kind,” Credit Suisse said. “The ringgit rose against the U.S. dollar in the last six months, impacting Karex with 90 percent of revenues in the U.S. dollar. The sharp rise in crude oil prices has impacted about 40 percent of its cost components such as packaging, silicone oil and transportation.”

The bank cut its earnings per share forecasts for fiscal 2018-20 by 36-52 percent and it slashed its target price to 0.48 ringgit from 1.20 ringgit.

Separately, Affin Hwang Capital cut its fiscal 2018-20 earnings per share forecasts by 14-23 percent, and cut its target price to 0.40 ringgit from 0.60 ringgit. It kept a Sell call.

“We believe that the current valuation is lofty,” it said in a note last week.

Assuming Karex’s fair valuation was at 20 times price-to-earnings, which is the glove sector’s long-term average, investors would be paying for earnings three years ahead, Affin Hwang said.

Not all are pessimistic

But other analysts were less pessimistic on Karex’s outlook.

CGS-CIMB upgraded the stock to Hold from Reduce in a note last week, pointing to the stock’s recent sharp selldown.

“At this juncture, we believe that the current share price has largely reflected its weaker earnings delivery and tough operating environment. Any further sell-down in its share price could be an opportunity for investors to accumulate its shares,” CGS-CIMB said.

It said it expected Karex would start showing sequentially stronger quarters, starting from the current fiscal fourth quarter. The optimism was on expectations that higher average selling prices would gradually pass on overall cost increases, the recent strengthening of the U.S. dollar against the ringgit and efforts to lower operating expenses, it said.

But CGS-CIMB still cut its fiscal 2018-20 earnings per share estimates by 3.5-23.2 percent, pointing to lower margins in the tender segment, lower assumptions for the U.S. dollar against the ringgit and higher overall cost increases. It cut its target price to 0.61 ringgit from 0.78 ringgit.

The stock ended Friday down 3.57 percent at 0.54 ringgit.

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