Summary
One of the world’s largest condom manufacturer, commanding c.20% global market share in 2023 with production capability of c.5.5bn pieces that is supported by strong in-house Research and Development (R&D) capabilities tailored to various demand and specifications.
Revenue is forecasted to expand 1.1% yoy and 9.5% yoy to RM513.5m and RM562.2m in FY25F and FY26F respectively, driven by (i) strategic growth initiatives through focusing onto high-margin products within commercial and Original Brand Manufacturing (OBM) divisions, (ii) rising global population, (iii) increasing healthcare awareness and (iv) venture into new synthetic condom market which is expected to be more cost competitive thereby could bolster margins.
Karex is derived based on FY26F core EPS of 4.2 sen pegged to PE of 26.0x, leading to a FV of RM1.10 (+32.5% potential upside from current price).
Investment Highlights
Obtained FDA and CE approval to market its new synthetic condoms. Karex has successfully obtained FDA approval on August 24, 2024 and CE certification in Europe in early July for its new synthetic condom. These approvals enable Karex to enter new markets and establish new distribution channels for their synthetic products, and simplify the regulatory process in other regions. With the product meeting both FDA and CE standards, this achievement is expected to accelerate approval and acceptance in additional international markets, thereby enhancing Karex's global presence, reach and market opportunities. Additionally, Karex is in the process of launching the Original Design Manufacturer (ODM) synthetic condom after obtaining these certifications.
Rising health awareness. According to the World Health Organisation, mpox spreads through close contact with an infected person, including skin-to-skin and mouth-to-mouth or mouth-to-skin contact (such as kissing). It is more common among those with multiple sexual partners. To prevent its spread, individuals should use condoms during sex and avoid new partners. Consistent condom use is a highly effective method for prevention of sexually transmitted infections, including HIV and STDs, as well as unplanned pregnancies. Condoms are affordable, safe, and widely available, and remain essential for preventing viruses like STD, HIV, and mpox.
Solid earnings growth prospect. Despite intense competition and pandemic challenges, Karex has shifted focus onto high-margin products within its commercial and Original Brand Manufacturing (OBM) divisions, boosting profitability with gross profit margins of 20%-25% in FY23 and to over 50% over longer term, compared to 7%-10% in the tender market. In FY24, Karex saw increased gross and operating profit margins despite a slight revenue decline. Karex has also partnered with a major OEM client to launch synthetic condoms in Europe in November 2024, followed by North America. Additionally, global regulatory changes concerning personal lubricants, which address safety concerns, well positioned Karex in the market.
Favourable synthetic condom industry outlook. Synthetic condoms, such as polyurethane (PU) and polyisoprene (PI) varieties, are emerging as a significant innovation in the condom market, replacing the over-century-old rubber technology. These condoms, priced between 3x to 4x compared to natural rubber condoms at USD0.12-0.20/pcs, offer advanced features and are set to be introduced by Karex under a new OEM segment. Karex's upcoming synthetic condoms will use a proprietary material is expected to be cost-competitive with natural latex, potentially offering a more affordable alternative in the future. Despite the higher initial costs and regulatory hurdles associated with synthetic condoms, they are projected to as a major growth area for Karex, with anticipated benefits including higher margins and increased market presence. The new product's launch, potentially under a prominent brand, aims to enhance credibility and market acceptance.
Home-built machinery to cater for various design requirements. As the largest condom producer globally, with an annual output of 5.5bn pieces, Karex holds approximately c.20% of the global market share. Karex's strong in-house Research and Development (R&D) capabilities encompassing product development, machine re-engineering, packaging innovation, and cost efficiencies from large-scale production will drive ongoing innovation and operational efficiency. Consequently, Karex can adapt its designs or scale up machinery in its plant to accommodate different specifications or increased demand.
Valuation & Recommendation
We initiate coverage on Karex with a BUY recommendation with a target price of RM1.10, based on 26.0x PE multiple pegged to FY26F EPS of 4.2 sen. The assigned PE multiple represents a 25% premium over the two-year average forward PE of Karex, which we believe is justified due to the promising industry and Group’s growth prospects as well as Karex’s dominant position in the sexual wellness industry, holding c.20.0% market share in the global condom industry.
We are optimistic on Karex's earnings growth prospects, given the prudent management practices evident in its financial performance that is able to navigate through various challenges and market fluctuations, eventually emerging as the world’s largest condom maker. Karex has managed to deliver solid results, indicating a strong foundation and effective management strategies. Moreover, Karex is actively exploring new technology and initiating innovation of its own brand condom, further bolstering our confidence in its growth potential.
Risk to our call include: Decline in global government spending on birth control, (ii) slow uptake of new synthetic rubber condoms, (iii) less favorable product mix, and (iv) challenges in raising prices to maintain profit margins.
Disclaimer
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Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
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Currency | Buy Rates (RM) | Sell Rates (RM) |
---|---|---|
USD | 4.449296 | 4.484012 |
EUR | 4.692599 | 4.701308 |
CNY | 0.615732 | 0.616932 |
HKD | 0.571606 | 0.576092 |
SGD | 3.310067 | 3.336427 |