KAREX has received approval from the United States Federal Drug Agency (FDA) to market its new synthetic condoms in the country, in quick succession after the European CE approval. This latest development significantly enhances KAREX’s growth potential, though large orders are more likely to come through in FY26 and beyond as the product gains traction. We maintain our forecasts, TP of RM1.12 and OUTPERFORM call.

FDA’s approval in the bag. KAREX has successfully secured FDA approval for its new synthetic condoms, just a month after obtaining CE certification in Europe. The FDA approval not only paves the way for KAREX to tap into new markets by enabling a new distribution stream for its synthetic products but also significantly streamlines the approval process in other countries and regions. Since the product has already met the stringent requirements of both the FDA and CE certifications, this achievement can help accelerate its acceptance and regulatory approval in additional markets worldwide, enhancing its global reach and market potential.

US condom market. North America, particularly the United States, holds a significant share of the global condom market. As of 2022, North America accounted for approximately 12%-13% of the global condom market, valued at about USD1.0b, according to Osum market research. Trojon, Durex and Karex’s ONE brands are the top three players.

A growing synthetic condom market. The global condom market was valued at USD8b in 2022. Natural latex condoms dominated the market, accounting for 82.4% of the market share. The remaining 17.6%, valued at about USD1.4b, consisted of synthetic condoms. Durex holds a dominant position in the condom industry with a 35.6% market share, according to Osum market research. The demand for synthetic condoms (made from materials like polyisoprene, polyurethane, and nitrile) has experienced strong growth particularly in North America, Europe and Latin America, where the populations are more prone to latex allergies. Popular synthetic condoms include Durex Avanti Bare, SKYN, Trojan Supra, Okamoto Zero One.

Strategic partnerships. KAREX has strategically partnered with a key OEM client to launch its synthetic condoms in the 2HFY25, with the first deliveries expected in November 2024. The European market has been identified as the initial focus, where the product will be introduced first. Given the product’s successful regulatory approvals, it is anticipated that North America will soon follow as a priority market for launching these synthetic condoms.

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 as this came within our expectation 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 4).

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 - 27 Aug 2024