For records, my average buying price of Karex was Rm0.419. The only reason I bought Karex is because I believe it has finally turned around and it has all the ingredients to be the next Topglove or Harta.

To discover multi-beggar stocks is not an easy task. Long-term investors who bought Topglove and Harta at their lows would have already amashed 40~50 times returns for their investment. The pertinent question - how to find the next Topglove or Harta? Let's examine what characteristics both Topglove and Harta possess in common, see below:

1. Their products are marketed worldwide. 

2. Company led by strong management.

3. Continuous R&D to improve quality from time to time. 

4. Company has healthy balance sheets to fuel expansions.

Karex was once the darling of investors when it was listed 2014. It has catered for 15% condom worldwide. Management has built own brand which will lead to higher profit margin going forward. Continous R&D is ongoing to look for condom which can transmit heats (mengitar haba yang terhasil semasa digesel), company is in net cash position, share price is near all time low level. No wonder it is a sought after stocks recently. 

You can read the latest Karex news appeared in The Edge Weekly.  

Karex, The Edge Weekly 2/3/2019

Karex Bhd, the world’s largest condom manufacturer, is a home-grown company based in Klang, Selangor. It produces 15% of the global condom supply and supplies to well-known brands such as Durex.

However, local investors seem to have lost confidence in the company in recent years. This is reflected in its sliding share price. The stock had plunged 85% from its peak in January 2016 to 46 sen per share on Feb 20.

This is hardly surprising as the company’s net profit has fallen drastically in the last few years. According to Bloomberg, Karex’s net profit nosedived from RM66.7 million in 2016 to RM10.1 million in 2018 despite its revenue growing from RM343.6 million to RM408 million during the period.

TA’s Choo, however, favours the stock and expects the company’s earnings and profit margin to recover this year. He says the fall in net profit in the last three years was mainly due to higher administrative and marketing costs incurred to promote the company’s own condom brand. The Karex condom, which has a higher profit margin than the company’s non-branded products, has not been selling fast enough to cover the company’s higher expenses.

“The company’s management had to go through a learning curve in marketing and selling their own brand to consumers. Previously, they were only manufacturing products for other companies. But now, they are selling their own brand of condoms in the market,” says Choo.

According to an analyst report by JP Morgan released in December last year, the percentage of the company’s administrative and distribution costs as compared with its total revenue had increased by 15%, 20% and 22% in FY2016, FY2017 and FY2018 respectively. The report also pointed out that the Karex brand had a higher gross profit margin (of more than 50%) than its non-branded products supplied to other companies (28% to 30%). It was also higher than those sold to governments and non-governmental organisations via tender projects (12% to 15%).   

Choo expects the company to turn around this year. He says sales of the Karex condom have improved in the last three years. The momentum could continue and contribute to the company’s earnings.

“Their own brand is more commonly seen on the shelf and has more exposure. This contributed about 4% to its total revenue in FY2014 and the number doubled in FY2016. It hit 15% in FY2018,” says Choo.

The steady increase and higher sales of the Karex condom could see a recovery in the company’s profit margin this year. “We are expecting it to climb about 10%,” he says.  

Choo says there have not been many changes to the company’s core business. “It continues to supply condoms to the commercial and tender market. That is why its revenue has been steady. It is the profit margin that has been affected.”

He says the management team has been looking for ways to improve the business such as being on the lookout for new factories and purchasing new machinery to improve efficiency.