KUALA LUMPUR (Nov 13): CGS-CIMB Securities Sdn Bhd said today it upgraded condom maker Karex Bhd shares to "add" from "hold" with an unchanged target price (TP) of RM1.10 after Karex announced yesterday the group’s proposed acquisition of the remaining 30% stake in 70%-owned subsidiary Global Protection Corp (GP) for RM42.26 million.

In a note today, CGS-CIMB analyst Walter Aw said the research firm views the acquisition positively given its earnings accretive nature.

"We view this positively given the earnings accretive nature of the proposed acquisition and operational synergies to its (Karex) business,” Aw said.

Yesterday, Karex said the acquisition by its wholly-owned subsidiary Karex Global Ltd (KG) will be financed entirely via issuance of up to 82.93 million new shares in Karex at an issue price to be determined later.

Today, Aw said although the deal will enlarge Karex’s share base, CGS-CIMB estimates it will still lift Karex’s earnings per share by 1.9% to 4.7% in financial years ending June 30, 2021 (FY21) to FY23.

"This is assuming that GP’s FY21-23F net profit would be flat at RM10.7 million (30% stake: RM3.2 million), which is conservative, given its two-year revenue/net profit CAGR (compound annual growth rate) (FY18-20) of 10.8%/915%. 

"This deal is also operationally synergistic as GP will become Karex’s wholly-owned subsidiary, allowing it to fully capture GP’s growing profitability, leveraging on the latter’s established own brands and extensive distribution channels.

"As the share price [of Karex] has corrected 27.5% since our last report (Aug 25), our upgrade is backed by: i) its robust earnings prospects (three-year EPS CAGR of 131.1%) driven by more favourable supply-demand dynamics; ii) its established own-brands in the condom market; and iii) its position as the largest condom maker globally (in terms of production capacity),” Aw said.

Meanwhile, Hong Leong Investment Bank Bhd (HLIB) analyst Farah Diyana Kamaludin wrote in note today that HLIB expects Karex's 100% ownership of GP to contribute positively to the earnings of Karex.

"While the acquisition would help plug MI (minority interest) leakage, we estimate that [Karex's] FY21-22 EPS would be diluted by 3% and 2% post share issuance.

"We keep our [Karex earnings] forecasts pending completion of the acquisition. We maintain 'buy', with unchanged TP of RM1.20 [for Karex shares]," Farah Diyana said.

On Bursa Malaysia today, Karex's share price settled up 7.5 sen or 9.62% during the bourse's 12.30pm break at 85.5 sen, which values the company at about RM855 million.

The stock saw some 20 million shares transacted.