Summary
1QFY25 core net profit of RM7.3m (+38.3% yoy, +36.6% qoq), is deemed in line with our full-year expectations, but below consensus expectations of RM29.4m and RM40.5m respectively.
Stronger CNP in coming quarters will be supported by expectations of gradual improvement in sexual wellness and medical products demand.
Maintain our BUY recommendation on KAREX, with an unchanged target price of RM1.04 based on 26.0x pegged to FY26F EPS of 4.0 sen.
Results Review
Results review. 1QFY25 core net profit climbed 38.3% yoy and 36.6% qoq, reaching RM7.3m (excluding forex loss and other exceptional items of RM5.9m). The result was driven by 4.2% yoy and 8.9% qoq increase in sales volume in condoms and personal lubricants. Sales to the commercial market were particularly robust, making up around 70% of total revenue. Meanwhile, GP margin expanded to 31.9% in 1QFY25, marking an improvement from 1QFY24 at 30.7%.
Besides, this quarter's higher tax rate is due to non-tax-deductible foreign exchange losses from intercompany loans between Karex's holding company and its Thailand subsidiary. This leads to an effective tax rate of c.70% and reduces profit after tax to RM1.4m.
Results were deemed within expectations. 3MFY25 core net profit of RM7.3m (+38.3% yoy) makes up to 24.9% of our expectations of RM29.4m, but only accounted to 18.1% of consensus expectations of RM40.5m. Better earnings were largely supported by improved sales in the US (+20% qoq) and Europe (+13% qoq), which mainly cater to the commercial market.
Operations Highlights. KAREX has commenced operating 2 synthetic condoms line in Hat Yai plant in late-Sep 24. The product will be launched in 10 countries, with shipments set to begin in Nov 24, while distribution activities are expected to start in 1QCY25. Pricing is 3-4x higher than the average selling price (ASP) of natural rubber (NR ASP: USD 0.02/pcs for tender market, commercial price at USD 0.04-0.15/pcs vs synthetic ASP: USD 0.06-0.07/pcs), with GP margin ranging 50%-60%.
Industry Highlights. We gather that nitrile raw material costs increased by c.5-6% qoq, while NR Latex costs rose by c.3% qoq. We foresee raw material prices to remaining elevated in the next quarter, due to rising material shipping costs and heavy rainfall elevating NR Latex prices. Supply issues persist in key Southeast Asian regions, especially Thailand, where adverse weather conditions like heavy rainfall and flooding have resulted in output constraint. Thailand, which accounts to one-third of world's rubber production, is expected to see 10%-15% decline in production in 2024. In contrast, raw nitrile material prices will soften due to Butadiene prices weakening as result of lower demand.
Malaysia’s glove export volume increased from RM11.8bn in CY23 to RM13.7bn in 11M24. This implies that the demand for gloves is on a recovery trend, which alleviates the oversupply condition. KAREX is maintaining two glove production lines in Hat Yai, Thailand. The glove segment reported a loss of -RM10m in FY23, with idle costs projected at -RM2m per quarter in FY24. However, KAREX is not planning to exit the glove business, as the ASP for customised customers remains above USD 30/’000 pcs.
Outlook. We expect stronger CNP in the upcoming quarters, driven by the contribution from synthetic condom sales, which will kick in in early Dec 24. With the approval for CE & FDA certification, KAREX is able to sell in Europe and the US (KAREX’s clients will be selling this product in up to 10 countries). In addition, By Mar 25, 6 additional lines will be added for synthetic rubber condom production. Depending on future demand, another 10 production lines will be set up in the existing warehouse next to the current factory. ASP for sexual wellness products is expected to maintain an upward trend with a c.10%-20% increase in certain regions.
Valuation. No changes to our forecast, given that the reported results came in line with in-house expectations. Maintain our BUY recommendation on KAREX with an unchanged target price of RM1.04. This is based on a 26.0x PE multiple, which represents a 25% premium from the 2-year average forward PE pegged to FY25F EPS of 4.0 sen.
Risk. 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.
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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 |