INVESTMENT MERIT

KAREX, the world's largest condom manufacturer, stands to gain from a condom industry expected to grow at a CAGR of 8.2% from 2023 to 2032. Boasting robust production and partnerships with over 200 brands, KAREX 's focus on innovative synthetic products is poised to drive growth. Anticipating a doubling of net profit in FY24F and a further 77% increase in FY25F, we assign KAREX an ADD rating with a fair value of RM0.78, in line with its competitors' historical average forward PER.

World dominated condom maker. KAREX is a dominant force in the global condom market with a 20% market share, essentially producing one in every five condoms. Despite industry sensitivities, KAREX boasts a significant production capacity with 55 lines, estimated to produce up to 5.5 billion units annually. The company currently works with over 200 brands, including Durex and Trojan. Barrier of entry is high as the group has met various stringent international medical grade supply standards across more than 140 countries.

Strong market demand. The condom industry is poised for growth, with the market expected to grow at a CAGR of 8.2% from 2023 to 2032, now valued at USD 8.6 billion, according to Global Market Insights estimate. This growth trajectory is propelled by an increased prevalence of sexually transmitted diseases (STDs) and sexually transmitted infections (STIs), governmental initiatives promoting condom use, and product innovations catering to varied consumer preferences. With over a million STIs contracted daily worldwide, the demand for condoms is set to rise, showcasing a robust market opportunity for KAREX.

Moving up the higher value chain. KAREX has experienced growth in its own brand segment, which has risen from approximately 15% of its turnover in FY21 to 17% in FY23 with bigger revenue pie. This is attributed to the company's superior R&D capabilities, which enable them to meet diverse consumer needs. The firm is poised to integrate synthetic materials into its condom production process by CY24, with expectations to elevate GP margins due to the innovative nature of the technology. Details are scarce, but management hints at significant interest from commercial clients in this potential market disruptor. Additionally, increased awareness of sexual health and more stringent government regulations have spurred wider use of KAREX 's personal lubricants, which command GP margins of 30%- 50%, varying by packaging and product specifications.

Forecasts. Post recorded a record high turnover and earnings recovery in FY23, KAREX anticipates its growth trajectory in FY24F to be fuelled by the full reopening of China's economy and higher tender orders due to the recommencement of humanitarian aid. Additionally, the company expects its innovative synthetic product to start contribution partially in FY24F and with full contribution in FY25F. With that, we expect KAREX’s net profit to surge double to RM22m in FY24F followed by another 77% to RM39m in FY25F, on the back of stronger turnover, favourable product mix and improving margins.

ADD rating with FV of RM0.780. We value KAREX at RM0.780, based on a targeted FY25F PER of 21x, aligns with the 5- year historical average forward PER of its main competitors, including Thai Nippon Rubber, Reckitt Benckiser, Church & Dwight, and Okamoto Industries. Our rationale hinges on KAREX’s standing as a leading global condom manufacturer poised for an earning rebound. This optimism is underpinned by the industry’s projected high single-digit CAGR volume growth and a favourable product mix that KAREX is well-positioned to capitalize on. There is no change to our TP based on ESG given 3- star rating as appraised by us (see Page 3).

Risks to our call include: (i) slower-than-expected volume growth, (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 - 27 Nov 2023