Investment Merits

• New product launch in the pipeline
• Encouraging industry growth outlook
• Rising efforts to curb the spread of sexually transmitted diseases (STIs)

Company Profile

Karex, the world’s largest condom manufacturer, has an estimated global market share of 20%. Its product offerings feature a broad range of condoms (in a variety of shapes, flavours, thicknesses and colours), as well as catheters and personal lubricants. Karex’s manufacturing facilities are in Malaysia (Port Klang, Pontian and Senai) and Thailand (Hat Yai). These facilities have a total combined annual capacity of 5.5bn pieces.

Highlights

New product launch ahead. Karex is on track to launch its synthetic condoms by 1H24 in Europe, after receiving the CE marking for the products. The group currently has one dipping line (for synthetic products) with the capacity to ramp up by another 500m within the next 1-2 months, after the launch of this synthetic product. We gather that the current synthetic condoms available in the market are made using two key materials – polyurethane (PU; adopted by Sagami Rubber Industries, Okamoto Industries and Durex) and polyisoprene (PI; utilised by Durex, Ansell, and LifeStyles’ SKYN). As both PI and PU are patented by other competitors, the synthetic product developed by Karex will comprise new materials yet to be adopted by other condom makers. Due to a nondisclosure agreement entered into with clients, management was tightlipped on indicating the name of the raw material, although we understand its cost is a lot cheaper than that of PU and PI, and tends to fetch higher margins when compared to non-synthetic products. The launching and marketing of this new product will be under Karex’s original brand manufacturing segment.

Sustained industry growth outlook. The global condom market size – estimated at c.USD8.2bn in 2020 – is set to grow to USD9.6bn by 2026 (CAGR: 7%), according to Facts & Factors. Key drivers are underpinned by rising awareness on condom use to reduce the spread of the human immunodeficiency virus (HIV) and other STIs, as well as the rising usage of condoms by young couples, sex workers, and the LGBTQ community, and ever-changing consumer demand towards the use of condoms. The free distribution of condoms via government and non-governmental organisations may help sustain condom makers’ sales – primarily in developing nations, where awareness about protected sex remains low.

Increasing efforts to contain the spread of STIs. According to the World Health Organisation (WHO), over 1m STIs are contracted daily worldwide – the majority of which are asymptomatic.

In 2020 alone, there were an estimated 374m new infections globally, with sub-Saharan Africa ranked first in terms of STI numbers vs other world regions, with an estimated 64.5m cases. This is equivalent to five in 100 persons having STIs vs one in 100 persons in the US. As WHO continues to step up efforts to eradicate STIs (referring to its latest policy fact sheet dated Jul 2023), we expect such spillover effects to benefit Karex’s tender sales segment (24% of FY23 revenue). This is because condom usage remains essential in the global effort to curb and prevent HIV infections, as well as pare down and/or prevent other STIs and unintended pregnancies.

Industry landscape turning favourable. The COVID-19 pandemic resulted in many smaller players (primarily from China) exiting the global market due to prolonged lockdown measures, which led to a decline in social activities. More so, efforts to re-enter the US market or the threat of new entrants are impeded by stringent US Food & Drug Administration approval processes (which could probably take >1-2 years, as condoms are being classified as medical devices) and the lack of operating leverage vs larger players. These factors, combined with the resumption of social activities post COVID-19, rising awareness on STIs, and growing consumer demand for premium products offer an exciting opportunity for Karex to unlock its growth potential in 2024.

Company Report Card

Results highlights. In 2Q24, Karex reported a core profit of MYR6.9m (+86% YoY). This was underpinned by sales picking up from the lubricants segment – albeit partially offset by slower sales in the tender segment from the Africa market. Core margins improved 2.5ppts YoY, driven by a better product mix, favourable FX rates, and normalised raw material costs.

Dividends. Karex aims to pay out at least 25% of PATAMI under its dividend policy. The group chalked a 49% dividend payout ratio in FY23.

Management. CEO Goh Miah Kiat oversees marketing, logistics, international business dealings and brand development. He has more than 24 years of experience with the group, and is assisted by other experienced board members such as Goh Leng Kian (who has over 30 years of experience in the rubber and latex industry) and Dato’ Dr Ong Eng Long (ex-president the Malaysian Rubber Product Manufacturers’ Association). Goh is also the nephew of Goh Yen Yen, Goh Leng Kian, and Lam Jiuan Jiuan, who are Karex board members.

Investment Case

Our FV range of MYR1.02-1.09 is based on 28x and 30x FY25F P/E, which is above the industry peer average of 22x. At the current valuation, we think the market has yet to price in Karex’s strong earnings growth for FY24 and FY25, as the new product launch is likely to contribute meaningfully to its bottomline. Note: The stock traded within a range of 38-40x P/E during Karex’s heyday in FY15-16.

Key risks: Failed product launches due to subdued customer acceptance, cost pass-through challenges, and higher-than-expected operating costs.

Source: RHB Securities Research - 15 May 2024