KUALA LUMPUR (Nov 8): CGS-CIMB Research has raised its target price (TP) for Karex Bhd by a massive 80% as it is positive on the condom maker's future prospects given the recovery in demand, favourable business environment and new product launches.
The research house lifted Karex’s TP to 72 sen from 40 sen previously and upgraded the stock to 'add' (from 'hold') as it believes Karex has finally turned the page, supported by multiple tailwinds in the operating environment and recent increases in selling prices.
“Since 1QFY2023 [first quarter ended Sept 30, 2022], we have begun to see tailwinds in the operating environment emerge — in addition to the weakening of the ringgit (98% of Karex’s sales are export-orientated), Karex has seen key input (latex, silicone oil, chemicals, et cetera) and operating (freight) costs declining since 1QFY2023. This is expected to bode well for Karex in terms of a recovery in margins,” said CGS-CIMB in a note on Tuesday (Nov 8).
The research house also raised its FY2023 to FY2025 projection estimates for Karex by 80% to 103% and anticipates the group to return to the black in FY2023 — after two consecutive years of losses — on higher sales from the sexual wellness division which are condoms and lubricants, lower input costs, weaker ringgit, and higher economies of scale.
CGS-CIMB said it expects losses from the glove division to be limited to RM5 million for FY2023, RM4 million for FY2024 and RM3.5 million for FY2025.
Furthermore, CGS-CIMB noted, its check with Karex also revealed the group aims to launch new condom products in the next six months.
“While management has yet to share key details, we believe these are likely to be products made from a new material type, based on ongoing R&D [research & development] activities in the past three years.
“These new products typically have higher margins (versus existing products), and we believe they could be marketed via Karex’s supply agreements with global condom brand owners and/or its own-brand sales channels,” added CGS-CIMB.
At the time of writing on Tuesday, Karex shares were up two sen or 4.3% to 48.5 sen, giving it a market value of RM510.93 million. The stock has risen 18.29% year-to-date.