CLOSING at RM2.49 last Tuesday, Karex Bhd’s shares are up 15.3% from their recent low of RM2.16 in mid-June.

Four of the eight analysts tracking the stock do not see any more upside for the world’s largest condom maker, whose factories churn out over five billion condoms a year for 120 countries and are set to make seven billion pieces annually by end-2017. The company’s concerns include higher labour costs, although it benefits when the US dollar strengthens against the ringgit.

The more bullish analysts, however, see the counter rising at least 20% to RM3 (Credit Suisse) and RM3.16 (Macquarie), according to Bloomberg data at the time of writing.

In an Oct 10 note, Credit Suisse admits that “near-term” earnings multiples “look rich” but it argues that Karex “has yet to capture the full earnings potential from its newly acquired brands”.

Even more boldly, Credit Suisse highlights that the condom business of Australian rival Ansell — which has a global market share of 14% — is up for sale and that an acquisition could fulfil Karex’s ambition to transform into a major branded player and compete in the same leagues as Reckitt Benckiser (Durex) and Church & Dwight (Trojan).

“While this would certainly be too huge an acquisition for a company the size of Karex … the key question is whether the Goh family (32% major shareholder) is willing to dilute its stake. Our analysis shows a 50:50 debt:equity deal would create a mild 1.4% earnings per share boost for Karex. If successfully executed, potential synergies should provide a boost to margins over time,” says Credit Suisse. Its calculation assumes a RM2.8 billion acquisition price tag — more than Karex’s market capitalisation of RM2.5 billion.

If the counter appreciates 20% to RM3, it could lift some of the seven bank-issued cash-settled Karex structured warrants. However, disregard the three SW expiring at end-October and late November.

Karex-CQ, which has a RM2.20 strike price and three-to-one conversion ratio, should be worth 78% more at 26.7 sen — assuming zero premium to the underlying stock — if the RM3 target price is attained. Closing at 15 sen last Tuesday, Karex-CQ fetched a 6.43% premium to the mother shares. The downside is that the Macquarie Securities-issued warrant only has three months to expiry on Jan 31 next year.

RHB Investment Bank recently issued Karex-CR, which has a RM2.65 strike price, 3.5-to-1 conversion ratio and expires on July 10, 2017. Issued at 15 sen apiece, the derivative would fetch a 5.83% premium if the underlying stock is at RM3. It would only trade at zero premium to the mother share if Karex fetches RM3.18 — it is not for the risk averse. 

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