• MYR1.02 FV, based on 22x CY25F P/E. Karex is poised to record a stronger FY25 underpinned by contribution from new synthetic products, solidified market position post consolidation, and swift R&D capability to meet everchanging consumer preferences. The recent Europe Conformite Europeenne (CE) and US Food & Drug Administration (FDA) approvals are testament to Karex’s brand equity in the global condom manufacturing industry. Its valuation remains compelling, currently trading at 18x CY25F P/E, below its pre-COVID-19 mean of 30x.

• New growth engines. Karex secured CE and FDA certifications for its new synthetic condoms in July and August. The certifications are set to pave the way for product launches in Europe and the US in FY25. While the synthetic material remains unknown, we understand it was much cheaper than other synthetic products currently available in the market, and it tends to fetch a higher margin. The rising adoption of synthetic products – given latex products are often associated with allergies, poor heat conductivity, shorter shelf life, and risk of deteriorating when in contact with oil-based lubricants – is set to continue to drive demand for synthetic alternatives to latex.

• Sustained outlook. The global condom market size was estimated at c.USD11.6bn in 2023 and is set to grow to USD20.7bn by 2030 (CAGR: 8.7%). Key drivers include the rise of awareness on condom use to reduce the spread of the HIV virus and other sexually transmitted infections (STIs). The rising usage of condoms by young couples, sex workers, the LGBTQ community, and ever-changing consumer demand are set to propel demand. The distribution of condoms via government and non-governmental organisations may help sustain condom makers’ sales – primarily in developing nations, where awareness on protected sex remains low.

• Industry landscape turning favourable. The COVID-19 pandemic resulted in many smaller players (primarily from China) exiting the market due to prolonged lockdown measures leading to a decline in social activities. Furthermore, efforts to re-enter the US market or the threat of new entrants are impeded by stringent FDA approval processes (which could take more than 1-2 years, as condoms are classified as medical devices) and the lack of operating leverage vs larger players.

• Earnings forecasts and valuation. We project a 3-year earnings CAGR of 36% from FY24-27F premised on rising global condom demand, contribution of new income stream from launch of synthetic products, solidified market position post consolidation, and swift R&D capability to meet ever-changing consumer preferences. We adopt a P/E-based valuation with 22x CY25F P/E to derive our FV. The valuation represents a 10% premium vs regional peers on the basis of its superior earnings growth prospects.

Source: RHB Securities Research - 30 Oct 2024