Karex's bonus issue has gone ex today with the issuance of 135m new bonus shares on the basis of one bonus share for every two existing shares. Post ex, our target price is adjusted to RM3.38. 

While it provides no fundamental change to Karex's prospects, the bonus issue is likely to boost the stock's liquidity and improve the near-term trading sentiment. Given Karex's strong fundamentals, the higher liquidity will give a boost to its share price. We expect Karex to post strong results in 2H as the six new production lines installed a few months ago start to make partial contribution in 3QFY14 and full contribution in 4QFY14. Despite the higher capacity arising from the four new production lines added in 2013, Karex is currently running at a utilisation rate of 81-82%. Its delivery lead time remains at a lengthy period of four months (two months more than the ideal delivery lead time), which indicates that there is strong demand for Karex's products. 

Accumulate. Despite the recent strong rally in its share price, we think that Karex is still an attractive stock in view of the strong demand for its products, as evidenced by the long delivery lead time of four months and high utilisation rate of 81-82% (despite the installation of four new lines in 2013). The prospects of dividend payouts could provide another re-rating catalyst.

Source: CIMB Daybreak - 27 March 2014, Full PDF Report