Karex down 1.33% following 1Q results, analysts' downgrades

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KUALA LUMPUR (Nov 27): Karex Bhd shares dipped 1.33% at mid-morning today, following the release of its first quarter results (1QFY18), as well as downgrades by analysts.

As at 10.30am, the stock fell two sen to RM1.48, with 249,800 shares traded. It has a market capitalisation of RM1.46 billion.

On Friday, the group released its first quarter results which saw a 49% year on year net profit decline, despite a 34% year-on-year increase in revenue which the group attributes to higher sales volume, especially in the tender segment, in the quarter.

As such, according to research houses, Karex’s earnings came in below expectations, resulting in revised price targets and calls.

Hong Leong Investment Bank (HLIB) Research has downgraded the stock to Sell, with a lower target price of RM1.04, from RM1.37 previously, explaining while it is long term positive on the group’s ambition to grow its own-brand manufacturing (OBM) segment, significant investments in this category will continue to impact profitability in the near term. The segment incurred higher distribution and administrative costs in the quarter.

“Karex’s 1QFY18 PATAMI of RM4.1m (-48.8% yoy, +43.2% qoq) was below expectations, accounting for 7.9% and 8.7% of HLIB and consensus full year estimates,” said HLIB research in a note today.

Affin Hwang Research too has lowered its price target to RM1.20, from RM1.30 previously, maintaining its Sell call, as it believes Karex’s OBM segment has “yet to receive critical mass.”

“Despite the higher sales volume, we believe that earnings growth for the year would likely be flattish, as lower product margin and higher fixed cost remain a challenge for Karex. Although we are still positive on the long term outlook of Karex in transforming itself to become a competitive brand in the OBM market, the short-term earnings growth is expected to be volatile,” Affin Hwang Research said in a note today.

CIMB Research however, while acknowledging Karex’s slower-than-expected recovery, had increased its price target to RM1.44, from RM1.40 previously, with no change to its Hold call.

“We expect Karex to record stronger earnings ahead, in tandem with higher average selling prices for condoms sold in the tender segment, as well as better cost control, especially in terms of distribution and administrative expenses,” CIMB Research said in a note today.