Strong global demand poised to spur Karex

PETALING JAYA: The outlook for condom manufacturer, Karex Bhd, is looking increasingly brighter, underpinned by strong global demand post-lockdowns and a favourable operating environment, said CGS-CIMB Research.

Karex, one of the world’s largest condom manufacturers should continue to see pick-up in demand momentum due to the increase in human footfall and interactions post-lifting of the lockdown measures of the past two years, the research house said in its latest report.

The group estimated demand to have plunged 40% in the lockdown period.

“Also, several condom makers globally have closed down in the past two years due to slow demand and impact of lockdown measures, leading to lower supply now despite rising demand.

“According to Karex, its capacity has been fully allocated up to the end of March 2023, which is positive,” said CGS-CIMB Research.

The research house noted the average selling prices of condoms are also escalating, with about 10% year-on-year increase in the final quarter of 2022, which is above pre-lockdown levels.

In addition, more condom brand owners were actively engaging manufacturers for outsourcing activities, to defray higher manufacturing costs and to place higher emphasis on marketing and distribution activities, it added.

CGS-CIMB Research said, “In our view, this bodes well for Karex given its competitive advantage in terms of condom manufacturing as the biggest condom producer globally as well as strong technical know-how.”

With key cost components, such as freight rates, silicone oil, and packaging materials expected to keep moving south, the research house expects margins to improve for the condom maker, especially from the final quarter of 2022.

Incidentally, for the quarter ended Sept 30, its first quarter for the fiscal year ending June 30 2023, Karex saw gross profit margins rising quarter-on-quarter from 5.4% to 23.7%.

CGS-CIMB Research is also upbeat about the group foraying into synthetic-based condoms, citing a research by Global Research Analysts Inc that showed the usage of synthetic-based rubber are expected to grow by a higher compounded annual growth rate (CAGR) of 6.2% to reach US$3.3bil (RM14.5bil) by 2027, compared with 5.4% CAGR for natural latex condoms across the same period.

“The same market research also suggests that the global market size for condoms was estimated to be US$7.5bil (RM33bil) in 2020 and projected to grow by a CAGR of 5.7% up to US$11bil (RM48bil) by 2027,” noted the research house.

On the other hand, CGS-CIMB Research estimated that it would cost two to three times more to manufacture synthetic condoms compared to natural latex ones, which would lead to higher selling prices.

Therefore, the research house expects Karex to launch its new synthetic-based products by supplying to large brand owners such as Durex, which would allow Karex to leverage on its strength as a condom manufacturer.

This is while tapping on the existing market reach and larger marketing budgets of these brand owners to sell the product globally.

“Should the group decide to launch its new products via its own-brand manufacturing (OBM), it would require a longer period to monetise this product, with significant investments required to market it.

“Furthermore, to establish its OBM presence in more countries, coupled with the fact that Karex’s OBM products only made up an estimated 13% of its sales for the quarter ended Sept 30.

“In our view, any plans by Karex to market its new synthetic-based products via OBM channels are likely to be in the longer-term, beyond 3-5 years,” CGS-CIMB Research said.

Hence, the research house has a “buy” call on the stock with a target price of 96 sen.

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