Stock Code 5247
● The CS Condom Market Report cited Reckitt and Church & Dwight as the most obvious suitors for Ansell's potential sale of its condom business. However, a big obstacle would be the anti-trust law that they would breach in virtually every market.
● The deal is estimated to fetch up to US$1 bn. Nonetheless, we believe the potential redflag regarding anti-trust law is quite widely known among industry players which suggests that the sale could attract other smaller players who might participate at lower bids.
● While Karex was not cited as a potential suitor, management has made little secret of its ambitions to transform into a major branded player over time and arguably has some experience in brand consolidation. The key question is whether major shareholder Goh family is willing to dilute its stake. Assuming a 50:50 combination of debt:equity to fund the deal, we estimate that it should have a mild 1.4% boost to EPS.
● Maintain OUTPERFORM rating with a target price of RM3.00 (22% potential upside).
Opportunity knocks
The Credit Suisse Global Condom Market report examined the potential consolidation of the industry as Ansell (an estimated 14% global share) is mulling the potential sale of its condom business.
Reckitt (30%) and Church & Dwight (10%) were cited as the most obvious suitors given their market positions and plans to expand, but a big obstacle would be the anti-trust law that it would breach in
virtually every market. Another major player, Okamoto (8%), appears to be pursuing an organic expansion strategy.
Too big to handle?
Based on past transactions, the team estimates that the sale could fetch up to US$1 bn. Thus on the surface, it appears that only the big players such as Reckitt and Church & Dwight would be able to absorb the deal size comfortably. Nevertheless, we believe the potential redflag regarding anti-trust law is quite widely known among industry players. What this suggests to us is that the sale could attract othersmaller players who might participate at lower bids.
It's now or never!
While this would be too big an acquisition for a company the size of Karex, it has made little secret of its ambitions to transform into a major branded player and compete in the same league as the bigplayers. The key question is whether the Goh family (majorshareholder at 32%) is willing to dilute its stake (an all-debt deal doesnot seem plausible) or fork out more capital to seize this rare opportunity. If successfully executed, potential synergies shouldprovide a boost to margins over time.
Maintain OUTPERFORM
Dominant production market share, fairly resilient demand and goodmanagement are reasons we like the stock. Near-term P/E multipleslook rich but we argue that it has yet to capture the full earnings potential from the integration of its newly acquired brands. We have a RM3.00 target price.
source: Credit Sussie – 10/10/2016
KAREX BERHAD
The Group is principally involved in the manufacturing and sale of condoms sterile catheters latex probe covers latex sleeves and rubber product. It is the world's largest original equipment manufacturer (OEM) condom maker in terms of capacity with an annual capacity of 3 billion pieces.
