We understand that KAREX has received CE certification for its new synthetic condoms which allows it to market the product in Europe. The latest development has significantly enhanced KAREX’s growth potential, though large orders are more likely to come through in FY26 and beyond. We maintain our forecasts, TP of RM1.10 and OUTPERFORM call.

CE certification in the bag. We understand that KAREX has received CE certification for its new synthetic condoms. As the product is now certified in conformity with EU health, safety, and environmental protection standards, it can now be marketed across the European Economic Area comprising EU, Norway, Iceland, and Liechtenstein.

The latest development has significantly enhanced KAREX’s growth potential, although we acknowledged that it takes time for its OEM clients to assess the market’s response to the product before they start to place larger orders, which is more likely to happen in FY26 and beyond.

FDA approval on the horizon. Meanwhile, recall that KAREX is currently also awaiting the FDA approval that will allow it to market the product in the US. We understand that the key difference between CE certification and US FDA approval lies in the regulatory scopes and processes. While both require adherence to quality management standards, CE certification typically follows ISO 13485, whereas FDA approval adheres to the FDA’s Quality System Regulation (QSR). We understand that the FDA approval could come by 4QCY24. KAREX first applied for FDA approval for its products in 2007.

A growing synthetic condom market. The global condom market was valued at USD8b in 2022. Natural latex condoms dominated the market, accounting for 82.4% of the market share. The remaining 17.6%, valued at about USD1.4b, consisted of synthetic condoms. Durex holds a dominant position in the condom industry with a 35.6% market share, according to Osum market research. The demand for synthetic condoms (made from materials like polyisoprene, polyurethane, and nitrile) has experienced strong growth particularly in North America, Europe and Latin America, where the populations are more prone to latex allergies. Popular synthetic condoms include Durex Avanti Bare, SKYN, Trojan Supra, Okamoto Zero One.

Strategic OEM partnerships. KAREX plans to collaborate with its key OEM clients to launch synthetic condoms in 2HFY25. Recall, it manufactures for over 200 OEM clients, including major brands like Durex and Lifestyles.

Forecasts. Maintained. To be prudent, we for now do not reflect any contribution from the product within our forecast period.

Valuations. We maintain our TP of RM1.10 based on an unchanged FY25F targeted PER of 25x, at a 20% premium to the average historical 5-year forward PER of its international peers to reflect its dominant market position and strong growth prospect. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like KAREX for: (i) its leading market position and global reach in the rapidly growing condom industry, projected by industry experts at a CAGR of 8% to 9% over the immediate term, (ii) its strong R&D and product innovation, (iii) its adherence to international standards and certifications, (iv) its strategic shift in moving up higher the value chain, and (v) post- pandemic market recovery and changing consumer preferences, especially in markets like China, and growing preference for high quality innovative condom products. Maintain OUTPERFORM.

Risks to our call include: (i) reduced spending by governments around the world on birth control, (ii) lower acceptance rate for its new synthetic rubber condoms, (iii) less favourable product mix, and (iv) inability to raise prices to safeguard profit margins.

Source: Kenanga Research - 3 Jul 2024