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QuestionsCategory: Valuation QuadrantCalculating PE Ratio
Thomas asked 5 years ago

Hi Rusmin/Victor,
I’m researching on this company Karex Bhd and come to the valuation part, I was calculating its PE ratio and this question came to my mind:

  1. When calculating current PE ratio, do I use the trailing 12 months EPS or EPS for the latest FYE of the Company?
  2. Is TTM PE much more reliable than using the PE based on latest FYE’s EPS?

The recent quarter results of this Company has been bad due to high distribution expenses, higher rubber prices and the private placement expenses which is one-off. Hence, the share price of this Company has dipped abit to 52 weeks low. However, the TTM PE is still high (51 times) as compared to IQ’s Rule-of-thumbs. Whats your take on this?

5 Answers
Victor Chng answered 5 years ago

Hi Thomas,
What is the historical PE for Karex?
 

Thomas answered 5 years ago

Hi Victor,
Well, Karex only listed on November 2013. So I only calculated its 3 year Historical PE based on adjusted closing prices on the date where the Company announces its 4th quarter results:

  • 2014=37.8;
  • 2015=35.8;
  • 2016=36.0;

If I were to use the TTM PE and compare against its historical PE, it seems very expensive right now. But if I calculate the current PE based on its 2016 EPS is 30.8 times; this result seems like its undervalued right now. So, I’m abit confused as to which PE ratio should I use.
 

Victor Chng answered 5 years ago

Hi Thomas,
Since their Latest earnings are being affected. You can take share price dividend by their average earnings to get their normalised PE.
 
On the side note why you do you feel Karex is undervalue right now?

Thomas replied 5 years ago

Hi Victor,

Thanks for the info. I feel Karex is undervalue because of the PE ratio that I have calculated which is 30.8 times as compared to its historical PE. In addition, about 90% of Karex revenue comes from the manufacturing and distribution of condoms which are ever growing in demand due to the increasing awareness of AIDS/HIV by the government and also the growing population. Plus, Karex is the OEM manufacturer for Durex as well.

Apart from this, Karex has several economic moats and one of it is high barriers of entry by competitors due to the stringent criteria for applying the certification in manufacturing condoms. The recent poor result is due to their one-off expenses (i.e. registration of trademarks) & higher distribution costs. But then Karex has been acquiring companies that are selling condoms in other countries for them to easy penetrate the foreign market by selling their own ONE brand in the near future.

Am I correct in my analysis? Whats your opinion on this?

Victor Chng answered 5 years ago

Hi Thomas,

Great analysis keep it up. Have you find the average PE trading range of Karex competitors and see whether they are trading premium or below their industry average PE.

On the side note I understand Karex want to do their own brand manufacturing but from my experience it is a different model compare to manufacturing. For instance, you look at the company that owned Durex, they just focus on marketing their product and outsource their manufacturing. Hence, for Karex business now they have to focus on manufacturing and marketing at the same time. Since manufacturing is their core profit hence they will definitely focus their attention there instead on the brand side. Of course it is too early to say, we have to track the management along the way.

Thomas replied 5 years ago

Hi Victor,

I couldn’t find any direct competitors for Karex but companies like Reckitt, Ansell & Okamoto has got same biz at the same time have other biz as well. When comparing against the 3 companies’ PE ratio, Karex seems to be the highest. I guess my analysis was wrong, Karex is currently still overvalued. Thanks for your info Victor!!

Victor Chng answered 5 years ago

Hi Thomas,
Thai Nippon Rubber that is listed in Thailand is their closest competitor in this region with comparable business. There is also other competitors like 

Cupid Limited

Sagami Rubber Industries Co

Thomas replied 5 years ago

Hi Victor,

Thanks for your info. Looking at all 4 companies side-by-side (source: yahoo finance):

Karex = PE 49.75
Thai Nippon = PE 28.33
Cupid Ltd = PE 17.63
Sagami = PE 18.42

Karex’s current PE is the highest among its competitors. I guess, it does seems to be overvalued at the moment.

Victor Chng replied 5 years ago

Great observation Thomas, now we have to see if they are able to grow fast to reduce their PE in the future