PETALING JAYA: Karex Bhd’s earnings prospects look positive in line with the recovery in demand for condoms, favourable operating environment and new product launches, says CGS-CIMB Research.The research house also expects Karex to post stronger margins, backed by higher economies of scale, a weaker ringgit versus the US dollar and lower operating costs.
In its latest report, CGS-CIMB Research said the winds of fortune, in terms of the operating environment, have begun to blow in favour of Karex.
“Since the first quarter of the financial year 2023 (1Q23), Karex has seen its key cost components, such as freight rates, silicone oil and packaging materials, decline.
“The group is also expected to benefit from the weakening of the ringgit against the US dollar, as 98% of its revenue is derived from exports.
“This will bode well for Karex’s margins, which we believe will be expanded by rising average selling prices and a lower cost base,” the research house explained.
On top of that, CGS-CIMB Research said Karex has seen a strong recovery in global demand for condoms.
This is on the back of the easing of lockdown measures globally, it said, adding that Karex estimated condom use declined globally by up to 40% during the Covid-19 period, the first half of 2020 (1H20) through 1H22.
In addition, the group is set to benefit from lower competition with the closure of several condom plants around the world over the past two years.
CGS-CIMB Research envisaged that the group’s new product launches could be potential game-changers in the condom market, given its ongoing investment in research and development activities. Currently, Karex solely produces latex-based condoms.
“In our view, Karex may look to launch any of its new products via original equipment manufacturer (OEM) for large brand owners or via its original brand manufacturer (OBM).
“Both sales channels have their own pros and cons, but we believe the former will pay the most dividends,” added the research house.
This will allow Karex to leverage its strength as a condom manufacturer by focusing on manufacturing, while allowing large brand owners to market the products with their existing global market reach as “they have a larger marketing budget.”
Should Karex decide to launch its new products via OBM, it would require a longer time to monetise them, with significant investments to market the products and to establish their OBM presence in more countries.
Karex’s OBM products only made up 18% of its financial year 2022 sales.
“However, in the event that these new products are able to be marketed successfully via its OBM channels, this would allow Karex to generate better margins in the longer term, compared to via its OEM sales channels,” said the research house.
Meanwhile, CGS-CIMB Research during a recent visit to Karex’s glove plant in Hatyai, Thailand, noted that the company has completed the installation and commissioning of the first phase of its glove plant, which consists of two production lines with an annual capacity of 480 million pieces.
“However, in view of the current weak operating environment in the global glove industry, we gather Karex is not commercially producing gloves from both lines at this juncture.
“In addition to further upgrading works, Karex is awaiting validation results and approval for its glove products.”
Karex is also holding off any further capacity expansion plans for its glove business until the operating environment improves, said CGS-CIMB Research.
“Assuming no commercial production from its glove production lines since the middle of 1Q23, we understand that Karex expects losses from its glove business to be limited to a maximum of RM1.5mil quarterly.”