Quick take: Karex dips on negative news flow

KUALA LUMPUR: Karex Bhd opened lower in the red on Friday following media report that the company provided poor living conditions for its foreign workers.

The world's largest condom maker fell 2.2%, or one sen to 44 sen with 286,700 shares traded.

In a report by UK daily The Telegraph, Karex was accused of providing inhumane living conditions for its workers. This was based on an interview with 22 Nepalese and Bangladeshis employed by Karex.

Several concerns were raised in the report including unhygienic living conditions, lack of basic necessities in the living quarters, poor security, and low wages leading to the need to work excessive overtime.

According to CGS-CIMB Research, the news was likely to adversely affect sales in the short term especially in the commercial and own-brand segments.

“We believe that branding is a vital element in driving sales in these segments.

“However, we gather from Karex that none of its own-brand and commercial segment customers contributed more than 1% of its full-year FY18 revenue,” the research house said.

CGS-CIMB noted that in1QFY19, Karex’s sexual wellness division (condoms and lubricants) contributed 90% of the group’s total revenue.

In this division, commercial and own-brand sales made up 35% and 13% of 1QFY19 revenue respectively.

“Our earnings estimates are intact pending further updates on this matter. Karex remains a reduce with a target price of 47 sen (28x CY19F P/E, -1 s.d. of its five-year mean),” CGS-CIMB said, adding that potential de-rating catalysts were sharp increase in operating expenses and spike in latex prices.

“We would only turn more positive on Karex in the event of stronger-than-expected increase in ASPs, higher sales volume, especially in tender segment, and decline in own-brand manufacturing expenses. Stronger-than-expected condom sales volume is an upside risk to our call,” CGS-CIMB said.

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