KAREX’s 1HFY24 results beat expectations with record margins, driven by a favourable product mix. It is riding on higher-margin products on a positive global condom demand growth trajectory. We raise our FY24-25F net profit forecasts by 6% each, lift our TP by 6% to RM1.06 (from RM1.00) and maintain our OUTPERFORM call.

KAREX's 1HFY24 net profit of RM12.6m beat our expectation at 57% of our full-year forecast. There was no consensus estimate available at present. The key positive variance against our forecast came from a favourable product mix resulting in record margins. As expected, no dividend was declared during the quarter.

YoY, its 1HFY24 top line declined 6% mainly due to slower condom sales in the tender market, partially offset by robust sales of personal lubricants. However, its net profit almost tripled thanks to a shift towards higher-margin products amidst a slowdown in the tender market, stabilised input cost and favourable exchange rates. Its gross profit margin rose to 33% (from 24.7% a year ago).

QoQ, its top line declined by 2% on lower condom sales in the tender market, partially cushioned by improved personal lubricant sales (which accounted for 15% of overall revenue compared to 10% in FY23). Meanwhile, its core net profit jumped 39% driven by a favourable product mix.

Outlook. KAREX is poised to benefit significantly from the sustained growth in global condom demand, projected by industry experts at a CAGR of 8%-9% over the coming decade. Its strategic shift towards concentrating on products and segments with higher margins is expected to enhance its profitability notably. Karex's emphasis on premium and superior-quality products aligns seamlessly with the evolving trends in the market. Furthermore, the expected stabilization of raw material prices and freight costs should contribute to the consistency and stability of Karex's earnings in the future. In addition, we expect the maiden contribution from its synthetic condom product to be reflected in 2HFY25 onwards rather than our earlier expectations of 1HFY25.

Forecasts. We raise our FY24-25F net profit forecasts by 6% each, having raised our gross profit margin assumption to 30% (from 28%) on a favourable product mix.

Valuations. Consequently, we lift our TP by 6% to RM1.06 (from RM1.00 previously) 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 3.5-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, (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 - 27 Feb 2024