Financial Dashboard), is looking to collaborate with local, established retail chains in the eurozone — be it hypermarkets, supermarkets or drugstores — to come out with condoms under their respective house brands.Karex chief executive officer Goh Miah Kiat said the group already set the wheels in motion on April 4, when it acquired Powelton SL, a shelf company in Spain via Karex’s Hong Kong-based subsidiary, Karex Global Ltd.
“Following the acquisition, Powelton SL was renamed Karex Europe Pte SL, which will serve as a platform for the group to expand its market presence in Europe,” he added.
Goh said Karex had set up a team to look after the European market, and it is now in talks with several companies to come out with their own “private labels”.
“We have yet to identify any targets. Our European team is in negotiations with [a few potentials],” he added.
The eurozone has been grappling with a sovereign debt crisis since 2009, but Goh remains unfazed, saying that the group is confident that it will benefit from the situation.
“Yes, [we] definitely will benefit from it. With the eurozone financial crisis, the people there are more cautious about prices [of products]. The days when people were ‘brand-centric’ and won’t buy something deemed ‘cheap’ have passed.
“Hence, we thought of working with well-established local brands, be they hypermarket chains like Tesco or pharmacies such as Watson’s or Guardian, to introduce condoms under their names,” said Goh.
Goh said Europe is a relatively mature market, and the people there are aware of the importance of condoms.
“So, whether it is a branded or non-branded condom, if they can save two or three dollars on house brands, they will do so,” Goh told The Edge Financial Daily in a recent interview.
Once proven successful, Goh said the group will replicate the same business model in the Middle Eastern and African markets.
“Demand in Africa has been steadily increasing, and the people there are more willing to spend now as the AIDS prevention awareness starts to rise,” he added.
Karex, which makes condoms for customers in more than 110 countries, saw its original brand manufacturer (OBM) segment — or condoms under its own brands — contribute 8% of the group’s top-line for the financial year ended June 30, 2014 (FY14) (FY13: 4%), with the remaining 92% made up by its original equipment manufacturer segment.
The increase in OBM contribution was due to the inclusion of Global Protection Corp’s (GP) ONE brand condoms, which are distributed in the United States. GP is Karex’s 55%-owned subsidiary, which it acquired for US$6.6 million in 2014.
The group targets to increase its OBM revenue contribution to 20% by 2020.
Other in-house brands that it owns are Carex and Inno, and Karex plans to leverage its existing footprints in various markets to establish its own brands for long-term sustainability, a plan which the group has committed to allocating at least RM100 million as capital expenditure for the next three years.
Additionally, Karex is looking at expanding its brand presence through mergers and acquisitions (M&A), which will see the group buying into companies that own prominent brands or good manufacturing capacities.
“We are in talks with several players in regard to joint ventures or partnerships, but nothing has materialised yet,” Goh said.
In April, Karex announced that it was on the lookout to acquire at least one company “that will provide relevant synergies and complement its existing business, particularly in the distribution channel” in the next 12 months.
At the time, Goh said the group was in talks with several companies globally, but the discussions were very much preliminary, with no firm agreement sealed.
The group raised some RM158 million in a private placement of up to 40.5 million shares or 10% of its issued capital earlier this year, and it will use the bulk of the proceeds for its M&A activities.
Presently, Karex has three factories located in Pontian, Johor, Port Klang, Selangor, and Hat Yai, Thailand. The three plants produce about four billion condoms annually, with Pontian producing around two billion, Hat Yai 1.2 billion and Port Klang 800 million.
For the third quarter ended March 31, 2015 (3QFY15), Karex’s net profit rose 32% to RM15.21 million or 2.45 sen a share from RM11.54 million or 1.9 sen a share a year earlier, on sales of higher-profit-margin products, favourable currency exchange rates and lower raw material prices.
Revenue, however, was 4% lower at RM71.4 million from RM74.62 million for 3QFY14, due to higher commercial orders received, resulting in longer lead time for production.
Karex is poised to benefit from the continued weakening of the ringgit, which is forecast to breach 3.80 against the US dollar in the short term, as the group’s production costs are mostly in ringgit — though about 30% of its raw material costs are priced in US dollar — while its sales are about 90% in US dollar.
“It’s definitely positive for us,” said Goh.
On the 10.27% natural gas tariff hike that Gas Malaysia Bhd ( Financial Dashboard) announced last Tuesday to RM21.80 per one million British thermal units from July 1, Goh said it will have only a minimal impact on the group’s costs and earnings.
“Electricity still remains as the main source of our energy,” he said, adding that the group has minimal usage of gas in its manufacturing process.
Karex shares closed one sen or 0.3% higher at RM3.05 last Friday, with a market capitalisation of RM2.038 billion. The stock has gained 25% year-to-date. Goh’s family remains the single largest shareholder of the company, with a stakeholding of 63%.
This article first appeared in The Edge Financial Daily, on June 15, 2015.
