KAREX is riding on the strong growth in the condom industry, focusing on high-margin products which will take its profitability to a higher level. It is penetrating high-growth markets with premium offerings backed by innovation and strict compliance with international standards. We project its earnings to double in FY24, followed by another 88% surge in FY25. We initial coverage on KAREX with an OUTPERFORM rating and a TP of RM1.00.

Robust condom industry outlook. The global condom market is on an impressive growth trajectory, projected to nearly double from USD8-9b in 2022 to USD19-23b by 2032, with a robust CAGR of 8%-9%. This surge is fuelled by heightened consumer awareness, a diverse array of products catering to varied preferences, and global initiatives to curb sexually transmitted diseases (STDs) and sexually transmitted infections (STIs). KAREX, being the world largest condom manufacturer with a 20% market share and produce up to 5.5b pieces annually, is well-equipped to ride rising industry demand.

Strategic earnings growth prospect. Amid a decade marked by stiff competition and the impact of the pandemic, KAREX has successfully shifted its focus to high-margin products and segments, especially in its commercial and Original Brand Manufacturing (OBM) segments. This strategic redirection has substantially boosted the company's profitability, with these segments yielding gross profit margins significantly higher than the tender market, at 20%-25% and over 50% compared to 7%-10%. In 1QFY24, despite a slight reduction in revenue, KAREX achieved impressive increases in both gross profit and operating profit margins, underlining the company's resilience and the effectiveness of its strategy in targeting more profitable segments.

Advantageous business climate. KAREX excels in the industry with its commanding market presence, cutting-edge R&D efforts, compliance with rigorous international standards, and agility in responding to post-pandemic shifts in consumer preferences, particularly towards superior quality condoms in growing markets like China. KAREX's strategic focus on premium and top-quality products is well-aligned with the current evolution of market trends. Besides, the stabilization of raw material prices and freight costs are poised to contribute to the consistency and stability of KAREX's future earnings.

Stronger financial performance ahead. We expect KAREX to achieve a significant 24% annual revenue growth in FY24 and FY25, spurred by increased activity in its commercial, OBM, and tender segments. The company's profit margins are likely to see an uplift due to an advantageous product and segment mix, along with stable costs for raw materials and freight. This is expected to lead to a substantial net profit increase, with projection of a 113% rise to RM22m in FY24, and a further 88% growth to RM42m in FY25.

Valuations. We value KAREX at RM1.00 based on 25x FY25F PER, at a 20% premium to the average historical 5-year forward PER of its international peer to reflect its dominant market position and stronger growth prospects.

Source: Kenanga Research - 5 Feb 2024