How far can Karex stretch?

  • Business
  • Saturday, 01 Aug 2015

Analysts say M&A activity can be a catalyst for the condom maker

Karex Bhd is looking for more growth avenues to strengthen its positioning in the condom industry, despite it already being the world’s largest condom manufacturer.

But market observers are questioning if the company’s valuations are stretched and how much farther it can go, considering the stock now trades on a price-earnings (PE) multiple of 46 times its earnings.

In comparison, Australian condom maker Ansell Ltd trades at a PE of 43 times, while London-based Reckitt Benckiser Group Plc is hovering around 28 times while Japanese Okamoto Industries Ltd trades at 19 times its earnings.

But Karex is different from these peers, as it is a pure condom manufacturer, while Ansell also sells a wide range of hand and arm protection solutions and clothing.

Reckitt Benckiser, which markets the popular Durex condoms, has a variety of other products and brands under its sleeve, including the medicated lozenges Strepsils, disinfectant cleaner Dettol, and home care products like Air Wick and Vanish.

As an original equipment maker, Karex manufactures for commercial customers such as Durex and LifeStyles, among others.

Goh: ‘There are lot more fun ideas out there in the market and we think we can leverage on those brands.’
Goh: ‘There are lot more fun ideas out there in the market and we think we can leverage on those brands.'

However it is also growing its own brand manufacturing (OBM) segment, which are products that it makes and markets itself.

“Everyone has been looking at us from a pure manufacturer play but I think once we are our own brand that’s where the true value of Karex will be seen,” says chief executive officer Goh Miah Kiat.

On Tuesday, Karex’s share price gained 7.8% from the previous day, recording an all-time high at RM3.60 before it closed the day at RM3.59. It has since come down, settling at RM3.48 yesterday.

The company has been reaping benefits from the stronger US dollar as its products are sold in that currency. However, Goh admits that the strength of the dollar has affected some of its non-US based clients. The impact is not so severe as these clients may just hold back or delay their orders, rather than cancel them.

Analysts, however, say the company’s aggressive expansion plan, to have a capacity of five billion pieces by end-2015, six billion by end-2016 and seven billion by end-2017, has already been priced in, indicating that current valuations are rich.

In addition, since its initial public offering (IPO) exercise in November 2013 which priced its shares at RM1.85 each, the company has already gone through two rounds of bonus issues.

However, merger and acquisition activity could act as a catalyst for Karex, analysts say.

The second phase

Goh has hinted at further M&As since Karex acquired a 55% stake in US-based Global Protection Corp last October.

Although he says the company has several targets in mind, it is important to make sure the strategies and outlook between parties are aligned.

“What Karex is doing now is laying the foundations for the second phase. It’s a very critical moment right now to make sure the acquisitions are something that will be in line with our long-term strategy,” he tells StarBizWeek.

Karex is sitting on a cash pile of RM219mil, and is on the lookout for a combination of both brand owners and manufacturers to help it fortify its position as the No.1 condom player in the world.

“We are looking at more brands to consolidate into our brand. There are lot more fun ideas out there in the market and we think we can leverage on those brands. We are also looking at condom distributors. And also manufacturers that produce products that we can’t produce,” he adds.

Some of the developments within the condom industry, such as products made out of synthetic material, could take between 10 and 20 years to develop the technology for a product before it is introduced into the market.

Karex will be launching its polyisoprene condoms by the end of the year, a product which has been in the research and development (R&D) stage for at least seven to eight years.

“If you start looking at some new products today, it would probably take you more than 10 years if you’re lucky. Definitely we would like to cut that time short,” he says.

Goh says the company will make an announcement on this in the “near horizon”.

Karex’s “second phase” involves the company developing its people as well as increasing staff count, from its current base of 2,400.

The company will be shifting its focus towards branding and innovation. “There is a lot more innovation that can happen in condoms. The technology to make condoms has been around for 100 years. But people’s expectation from a condom is different. They want to feel different,” he says, adding that Karex will be making more investments into R&D.


The company’s partnership with Global Protection gives it the right to distribute the ONE brand condoms in South-East Asia, China, Hong Kong, Taiwan, North Africa, Middle East, Australia, New Zealand, Japan and South Korea.

Karex plans to launch the ONE brand, known for its circular packaging and artistic designs, in Malaysia and Singapore on World Aids Day which falls on Dec 1.

So far, the ONE brand is contributing about 10% to Karex’ sales, and has increased its OBM contribution to 7% from 4% previously. Goh expects the OBM segment to grow by at least 20% in the next five years.

Also, Karex’s new manufacturing plant in Thailand is at the final stages of completion, which will complement its existing plants in Klang and Pontian, Johor.

The new plant in Hadyai, Thailand, which will be the first “green” condom factory in the world, will be certified as either gold or silver under leadership in energy and environmental design standards, a standard certification for green buildings.

The new plant will give the group an additional 50% of new capacity.

Meanwhile, the upgrading of its plant in Pontian is expected to be completed by the end of next year.

Karex is looking to grow its intimate lubricants business as according to Goh, there is growing demand from government-funded HIV/AIDS prevention and family-planning programmes.

“We started the lubricant business more than 10 years ago. Barriers of entry today are higher because regulations for these products are increasing. Notably, the size of the lubricants business in the world is already half the size of the condom business in value,” says Goh.

The company recently acquired a Spanish shell company listed on the Hong Kong Exchange. Renamed as Karex Europe Pte S.L., Goh says the rationale for the acquisition is to expand its presence in European markets.

“We have been trying to get further into the European market but it has been difficult. It hasn’t been doing as well as the rest of the world for us. Europeans prefer to deal with you if you’re somewhere in Europe,” he says.

He adds that there are lots of opportunities for Karex to work with supermarkets and pharmacies there which prefer to use their own brands. The European market only contributes around 8% of Karex’ revenue.

“Europeans may not necessarily want to buy cheaper products. They are an educated and developed society and they understand that condoms are a medical device. In that sense, Malaysians are more brand loyal compared with them,” says Goh.

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Business , Karex , condoms , Global Protection , valuation


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