We begin coverage with an Outperform rating and a target price that is pegged to 17x CY15 P/E, a 20% premium over the glove sector's average forward P/E in view of its 3-year EPS CAGR of 18% vs. 10% for the glove sector as well as its superior ROE. Furthermore, its status as the world's largest condom maker with a rising capacity will give it a considerable advantage.

Largest globally 
Karex is the largest condom maker in the world, with an annual capacity of 3bn pieces p.a. and ~10% share of global output. Despite being the largest in the industry, its utilisation rate reached 81% in FY13, indicating strong growth of the industry. The industry is expected to expand by 7.4% annually over the next four years, fuelled by (i) population growth, (ii) rising incidences of unwanted pregnancies and sexually transmitted diseases, and (iii) shortage of condoms. Given Karex's position and its plan to double its capacity by 2015, it is well positioned to grow in tandem or even outpace the industry's growth. Karex has the capability to meet its customers' demands, be it for designs or volume. Another edge that it has over its rivals is its base in Malaysia and Thailand, which are among the world's top three rubber-producing countries. It is also strategically located in the Asia-Pacific region, which accounts for 49% of global condom sales. These factors give Karex significant cost advantages. Aside from gaining traction in the commercial market, it is also poised to grow in the huge tender market as other prequalified manufacturers are relatively small.

18% 2-year EPS CAGR 
We are forecasting 2-year CAGRs of 18% for Karex's earnings and 24% for revenue. We have factored in higher sales volume amid continuous capacity expansion, as well as higher latex cost, which will be partially buffered by higher economies of scale. Karex was minimally geared even before the listing. We expect Karex to be in a net cash position in the next three years.

Source: CIMB Research, Full PDF Report