KAREX is rapidly expanding its synthetic condom production, with first shipments already dispatched to Europe and plans underway to significantly scale up capacity. The strategic partnership with an OEM client and entry into high-potential markets position KAREX to capitalize on the growing demand for synthetic condoms, which offer great margins. While this segment currently contributes modestly to overall production, its high margins and growth prospects bode well for future earnings. We maintain our forecasts, TP of RM1.12 and OUTPERFORM call.
We came away from a recent visit to KAREX's manufacturing plant in Hat Yai, Thailand, feeling positive of its long-term prospects. The key takeaways are as follows:
Additionally, the increase in Malaysia's minimum wage from RM1,500 to RM1,700 will add approximately RM1m to quarterly labour costs, considering KAREX employs around 1,500 workers in Malaysia, while the workers in Thailand won't be affected by the adjustment. Despite these challenges, the company does not expect any further impairments provision related to its glove business in the coming quarter and is exploring cost mitigation strategies, including operational efficiencies. From our understanding, cost of production in Hat Yai is considered lower than its Malaysia plant due to lower tax and cheaper land.
Outlook. KAREX expects to secure high-value orders for condoms and personal lubricants by leveraging its strong industry reputation, diverse product range, and regulatory expertise. While the shift between tender and commercial markets may disrupt traditional sales channels in the short term, the Group sees medium-term growth opportunities. Additionally, the move toward synthetic condoms in some markets presents a significant opportunity to expand market share moving forward.
Forecasts. Maintained.
Valuations. We maintain our TP of RM1.12 based on an unchanged CY25F 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 6).
Background of KAREX's Synthetic Condom. KAREX entered the synthetic condom market with recent FDA and European CE approvals, enabling it to distribute these products across key regions. The synthetic condom segment, valued at approximately USD1.4b and accounting for 17.6% of the global USD8b condom industry, is growing rapidly, driven by the demand for latex-free alternatives in North America, Latin America, and Europe, where the populations are more prone to latex allergies. Popular synthetic condoms in the current market include Durex Avanti Bare, SKYN, Trojan Supra, and Okamoto Zero One. Unlike competitors using materials like polyurethane (PU) and polyisoprene (PI), KAREX's synthetic product is made from a new unique blend, cost-effective material, marking it as the first and only material of its kind on the market, with higher margins.
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 - 5 Nov 2024
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