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QuestionsCategory: Stock ScreeningNot advisable to invest in Company who just gone IPO?
Eric Voon asked 7 years ago

Hi there,
Is it really not advisable to invest in company who just gone IPO? To be specific, i’m talking bout Karex Berhad, a condom manufacturer company in Malaysia (Johor) who just gone IPO in Nov 2013. Some simple key features of the company is as below

  • They are the largest condom manufacturer in the world which are able to produce 3 billion pieces of condom per annum
  • Their products are sold to brand owners in US,UK, Germany Netherland, Russia in which will be marketed under their own brand (Exp: “Durex” from Reckitt Benkiser group PLC UK, “ONE” from Global Protection Corp US, “Lifestyles” from Ansell Ltd US) and many more
  • Their Own brand products such as Carex, INNO were distributed in Singapore, Hong Kong, India, bangladesh, south africa, nigeria.
  • They currently have factories in Malaysia and thailand. 

How do they caught my attention:

  • News: Karex’s 55% Acquisition Of US Condom Manufacturer (Global Protection Corp) To Boost Long Term Earnings, source: The Edge Financial daily, 11 Aug 14
  • News : Karex To Double Production Capacity To 4 Billion With Pontian Factory Launch, source: The Edge Financial daily, 28 Mac 14
  • Condom might not be essential product in our life, but hey, i believe most men use condom before right? Especially in foreign country, i thk condom is a must for them. Most importantly, its a one-off product, once used, then throw. just like glove, just like Hartalega.
  • Their IPO price set at RM1.85, and today the price were traded at RM3.03. 

 
I’m still looking through their financial status but since they only went IPO last year, i can only view their last year annual report. For im a total invest beginner, i don’t actually know whether this company is undervalued or already fully valued by now. Im still taking my sweet time digesting the ratio ratio things, understanding how to start valuing company.
 
But anyway, just wana know, will you guys buy a share of an IPO company? 

3 Answers
Rusmin Ang answered 7 years ago

Hi Eric,          
 
Haha! What an insightful analysis that you have! You are right that no one re-uses their condoms (anyone here does??) making the condom industry ‘attractive’ to players like Karex.
           
I’ve personally avoided IPO stocks due to a simple reason: an insufficient track record. Not only that, most IPO stocks need to adapt to a new structure – stricter corporate governance, audits, etc. So it is not going to be stable at the start. Having said that, I will definitely miss out on IPO stocks that could potentially double (i.e. Karex) in a year or two but at least I am not compromising on my investment principles :)            
 
A rule is still a rule. But sometime there is always an exception to this. If Karex is really a good profitable company with trusted management and selling at a dirt-cheap price, why not? Speaking of this, KC Lau just wrote an article on The Fifth Person on whether you should invest in an IPO stock. Though it’s written for different company, Sasbadi, you could check out his article here. I think the principle is the same: Is it grossly undervalued now?     

Eric Voon answered 7 years ago

Hi Rusmin
 
Like you said, without their previous record, i cant really tell whether it is undervalued. Moreover,  karex is the only condom manufacturing company that were listed in Malaysia. In the case like this, how do I make comparison? Is it correct to roughly compare with the industry in other country. Say for exp, i calculated the P/E for karex now, then i compare the P/E value with condom manufacturing company in US just for a rough figure. is this correct?
 
One more thing i wana ask bout P/E also. For exp, i wanted to know the P/e of a company at this point of time, by now they only publish out 1st and 2nd quarter of 2014 report. So is it correct to take the current share price divided by (EPS of 1Q + EPS of 2Q) ?? but wont this normally show high P/E than their historical P/E since the EPS for another 2 quarter were still unknown. 
 
Appreciate your help
 

Rusmin Ang answered 7 years ago

Hi Eric Voon,  
 
You’re free to use relatively valuation method. If they trade at reasonable PE multiples, you can definitely compare them side by side. However, I noticed this method is only useful to a certain extend. Like for example, most tech-related companies in the US usually trade at extremely rich valuation. So assuming Tech A and Tech B has similar biz in the similar industry, Tech B trades at 80 times earnings may perceived to be cheaper than Tech A whose being valued at over 100 times earnings. Again, I may miss out huge opportunity from this hot and growing sector, but paying over-rated valuation is a no-no for me. Ultimately, it still boils down to how much you are willing to pay assuming the rest of the quadrants is fulfilled. For the case of Condom manufacturer, I’m not familiar with any of them other than well-known brand, Durex (under Reckitt Benckiser).   
 
One alternative that others do is that they multiply (1Q2014 +2Q2014) by 2. Unless the business is really predictable, I would suggest you to use the latest four quarters earnings. In this case, the combinations are the sum of 3Q2013, 4Q2013, 1Q2014 and 2Q2014 earnings.   
 
You’re welcome :)