KUALA LUMPUR: The pick-up in global demand for condoms continues to show strong momentum due to the increase in human footfall and interactions post-lifting of the lockdown measures of the past two years.
CGS-CIMB Research said the trend would benefit Karex Bhd, which will also benefit from several condom makers globally that have closed down in the past two years due to slow demand and the impact of lockdown measures, leading to lower supply now despite rising demand.
Karex has also estimated that global condom demand dipped 40 per cent in the past two years. The company's production capacity has now been fully allocated up to end-March 2023, which is a positive surprise.
"In addition, we gather that condoms' average selling prices (ASPs) remain on the rise by 10 per cent year-on-year (YoY) rise in the second quarter (Q2) FY23, which is above pre-pandemic levels," CGS-CIMB Research noted in a report today.
The research firm expects Karex to post stronger quarter-on-quarter (QoQ) and YoY Q2 FY23 results, backed by robust demand for condoms, with a utilisation rate above 80 per cent.
"We also expect Karex to see its gross profit (GP) and earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins tilting higher from Q2 FY23 onward, thanks to lower freight costs, especially intercompany freight costs that Karex bears when it delivers goods to Global Protection Corp, its subsidiary in the US, which locks contracts with its US-based clients.
"Further, Karex also stands to benefit from a decline in key input costs such as lubricant oil, aluminium foil, and higher economies of scale," the research firm noted.
Moving on, Karex is targeting commercial production of its new synthetic-based condoms by the second half (2H) of FY24.
The company is applying for US Food and Drug Administration (FDA) approvals (target to receive by the end of the first half (1H) of FY24, while scaling up production capacity to cater to these new products.
"We estimate that it aims to add an annual capacity of 150 million pieces, or about five per cent of total effective capacity, by 1H FY24 to cater to the production of this product.
"We gather that Karex is in talks with global brand owners to sign supply agreements for this new product. This allows it to leverage its manufacturing strength while allowing brand owners to market the product via their existing global market reach and larger marketing budgets," CGS-CIMB Research noted.
CGS-CIMB Research raised its FY23-FY25 to account for higher ASPs, better production output, and margin expansion from lower input costs.
The research firm reiterates an 'Add' call for Karex with a target price raised to RM0.96.
"We continue to like Karex as we believe the stock has finally turned the corner, backed by multiple tailwinds in its operating environment (lower input costs, ASP hikes, and strong demand) and re-rating catalysts to drive demand growth from the pick-up in demand for condoms globally and new product launches," CGS-CIMB Research noted.