KUALA LUMPUR: Affin Hwang Capital is terminating coverage on Karex Bhd with its last call on the stock being a "Buy".
This comes with a target price of 45 sen based on 1.0 times calendar year 2023 book value, Afffin Hwang said in a report today.
"We believe that re-rating catalyst for the stock would be its earnings delivery," it added.
Affin Hwang said Karex continued to report a weak set of results, as FY22 net loss of RM6.1 million was below both it and consensus expectation, amid expectations that the company's losses would improve in the fourth quarter.
"Despite the increase in revenue quarter-non-quarter, losses for the fourth quarter have increased, due to higher operating expenses with the hike in minimum wage in Malaysia and star-up cost from the new glove manufacturing arm."
Affin Hwang said Karex's earnings before interest, taxation, depreciation and amortisation margin for the fourth quarter of 2022 had declined to 2.9 per cent from 4.1 per cent previously.
This was despite the increase in sales with similar sales mix, mainly due to the higher wages with the implementation of higher minimum wage on May 1, and the start-up cost related to its glove manufacturing arm.
"Management mentioned that it is challenging for them to pass on the higher cost to its customer due to the short lead time. We believe that it would take Karex at least six to 12 months before they are able to pass on the incremental cost to its customers."
Affin Hwang said the Karex management guided that it had incurred around RM4.6 million of losses in FY22 related to the medical glove division, mainly for startup cost, expenses for the ISO
accreditation and licensing requirements.
"Although the glove plant will be ready for commercial production by the start of 2023, we believe that Karex will only start production if the average selling price for medical glove improve, as Karex is likely to incur more losses at current ASP.
"Management mentioned that they can redeploy the workers to their condom factories instead, if needed," it added.