Summary
Karex 2QFY25 reported a core net loss of RM2.9m, bringing the 6MFY25 CNP to only RM3.6m, which was below ours and consensus expectations at 12.7% and 7.0% respectively, due to the absence of sales in the international tender market and branded sales to public health markets in North America contributed to Karex’s 1HFY25 performance missing expectations.
Looking ahead, Karex aims to capture more high-value orders for condoms and personal lubricants by leveraging its strong reputation and unique product portfolio. However, revenue from synthetic condoms is expected to remain small next quarter, as Durex holds an exclusive two-year contract for the product in each market, restricting Karex's growth in this segment over the near term.
Downgrade to SELL recommendation with a revised TP of RM0.42 (from RM1.04), pegged to 26.0x PE multiple on revised FY26F EPS of 1.6 sen, ascribed with three-star ESG rating.
Missed expectations. Karex’s 6MFY25 core net profit (CNP) reached RM3.6m, missing both our and market’s expectations, reaching only 12% and 7% respectively.
YoY. Excluding extraordinary items such as forex gains (RM8.9m) and derivative losses (RM2.9m), 2QFY25 reported a core net loss of RM2.9m. This loss was primarily due to weaker sales of condoms and personal lubricants, particularly in international tender markets. The absence of sales in the international tender market and branded sales to public health markets in North America attributed to Karex’s 6MFY25 underperformance.
YTD. On the 6MFY25 basis, CNP at RM3.6m was a sharp decline (-67.8% yoy) due to unfavourable sales particularly from the latest quarter.
QoQ. The results for this quarter showed a core net loss of RM2.9m vs. CNP of RM6.4m recorded in 1QFY25, as explained above. Top-line revenue decreased by 20.8% qoq, reaching only RM107.0m, the lowest over the past 9 quarters.
Outlook. Looking ahead, Karex plans to capture more high-value orders for condoms and personal lubricants by leveraging its strong industry reputation and offering a unique product portfolio backed by regulatory expertise. Moreover, contribution from synthetic condoms will remain small in the next quarter, as the product primarily serves Durex, which holds an exclusive two-year contract for synthetic condoms in each market. This limits Karex to further grow in this product segment for the near term.
Earnings Revision. Due to the subpar performance this quarter, we have slashed FY25 and FY26 earnings down by 76.2% and 59.5%, respectively. The earnings downgrade is primarily due to: (i) a lower utilisation rate (a 10.0% reduction) for both natural rubber and synthetic condoms due to decreased sales, (ii) slower growth in personal lubricants, and (iii) a lower gross profit (GP) margin, which now stands at 30.5%. We have revised the margin forecast to a range of 28.0%-29.0%, down from 35.0%. We also introduce FY27 earnings forecast of RM22.5m.
Valuation. We downgrade to SELL (from BUY) with a revised target price of RM0.42 (from RM1.04), based on a 26.0x PE multiple applied to the FY26F EPS of 1.6 sen. The target price also reflects a 0% ESG premium/discount, in line with the company's three-star ESG rating. The assigned PE multiple is based on the range of Karex’s 2-year forward PE and the +1 standard deviation PE band. We believe a potential re-rating may not be on the cards over the near term, especially given the disruptions in the tender market caused by the Trump 2.0 administration, which has created a challenging environment for the condom industry.
Risk. (i) Tender market disruption (ii) Decline in global government spending on birth control, (iii) Slow uptake of new synthetic rubber condoms, (iv) Less favourable product mix, and (iv) Challenges in raising prices to maintain profit margins.
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Currency | Buy Rates (RM) | Sell Rates (RM) |
---|---|---|
USD | 4.425747 | 4.460392 |
EUR | 4.895220 | 4.904713 |
CNY | 0.606938 | 0.608107 |
HKD | 0.568828 | 0.573311 |
SGD | 3.311739 | 3.338136 |