This article first appeared in The Edge Malaysia Weekly on December 19, 2022 - December 25, 2022

THE consolidation in the condom industry brought about by the Covid-19 pandemic, coupled with the easing of lockdowns globally and commodity prices, have put Karex Bhd back on the recovery path. The world’s largest latex condom maker by production capacity now sees room to improve its profit margins in view of a strong demand for its products.

“Demand will remain strong until next year, and the boost from profitability will come with cheaper raw material costs. To a certain extent, lower raw material prices will offset the rise in labour costs. We believe FY2023 (ending June) will be a better year, and we still have room to grow our gross profit margins, which used to be 26%-28%, from just under 25% currently,” CEO Goh Miah Kiat tells The Edge in a recent interview.

Karex suffered a net loss of RM1.02 million and RM6.19 million in FY2021 and FY2022 respectively, due to logistics network disruptions and high raw material prices, before turning profitable in 1QFY2023 with a net profit of RM2.29 million.

Notably, a record quarterly revenue of RM145.03 million was registered in 1QFY2023, thanks to a sharp spike in sales from the commercial and tender segments.

Still, the group is far from returning to the glory days of 2016 when its annual net earnings peaked at RM66.69 million and its share price hit a high of more than RM3. Shares in Karex have been on the rise since early October, gaining 72.8% so far this year. The stock closed at 70 sen last Thursday, translating into a market capitalisation of RM737.42 million.

While declining to disclose the total number of condoms it had produced, Goh says the group’s production capacity remains at five billion pieces per year.

In view of rising demand, it is prepared for capacity expansion, especially at its plant in Hatyai, Thailand. This is because the business environment there is more favourable, given that raw material and labour resources are easily available. Its key input costs include freight rates, silicone oil and packaging materials.

Going forward, its Malaysian plants will focus more on the premium products, while there will be a shift of some mass-market products to Thailand.

“Our customers are also moving towards premium products, which will bring average selling prices (ASPs) higher,” notes Goh.

Over the past two years, Karex’s products, on average, have seen price hikes of 10%, with some even up to 15%. ASPs in 2023 are expected to be stable, he says.

Although a weak ringgit bodes well for exporters like Karex, he hopes for less volatility in exchange rates to avoid hurting market demand.

“I hope the US dollar won’t become too strong. To a lot of third-world and developing countries, the strong US dollar will become a problem because they can’t afford to buy our products.”

Despite being loss-making in the past two years, Karex continued to spend on research and development (R&D), investing some RM10 million. It is set to launch graphene condoms in the US early next year.

“Graphene is one of the thinnest materials ever with super strength. We have successfully incorporated graphene into rubber [and] done a clinical trial,” explains Goh.

It will roll out synthetic condoms next, which are also thinner and can transfer heat better. “We’re likely to be the world’s first condom maker to launch such a product. We believe the future is to move from latex to synthetic condoms. We are still working on the plan and getting regulatory approval.”

While prices of synthetic and graphene condoms will be higher than those of latex condoms, he says the intention is to set affordable prices for the new products.

Meanwhile, Karex is looking to increase contribution from its original brand manufacturing (OBM) segment, which made up 18% of its total sales in FY2022. For example, it completed the acquisition of the remaining 30% stake in US-based Global Protection Corp (GP) for RM42.26 million at the end of last year. GP is now the main distributor of Karex’s products in North America.

“The segment’s revenue contribution was only 3% during our IPO in 2013. We have been acquiring brands, but it will take some time to build up the brand,” says Goh.

The tender and commercial segment made up of the remaining 23% and 59% of total sales in FY2022 respectively. The tender segment involves bulk purchases by institutional buyers comprising government agencies and non-governmental organisations, while the commercial segment is catered for brand owners, which then distribute products to end users.

“We are seeing growth in all segments. In the next few quarters, there will be strong growth in the tender segment as a lot of governments are running short of condoms. The United Nations’ goal is to eradicate HIV/AIDS by 2030. So, between now and 2030, I can see that it will need to intensify condom purchases,” he says.

Geographically, the Americas will continue to be the largest sales contributor to the group, at 42% in FY2022. With the changes to the abortion laws in the US, Goh expects the use of condoms to increase. According to The New York Times, most abortions are banned in at least 13 states.

Citing France’s recent announcement to provide free condoms to 18- to 25-year-olds to minimise the spread of sexually transmitted infections, he foresees a pick-up in demand for condoms in Europe, which contributed 19% to its FY2022 sales, while the remaining 26% and 13% of sales were from Asia and Africa.

Karex, which has a presence in 140 countries, started as a rubber processing company before the condom manufacturing foray more than three decades ago. The company was listed on the Main Market of Bursa Malaysia in November 2013.

It employs 3,500 people across three plants in Johor and Port Klang, Selangor, as well as its plant in Hatyai, of which 600 are foreign workers.

Despite the normalisation of glove demand and ASPs, Karex will proceed with its glove venture, which was first announced in August 2020 during the height of the pandemic. About RM40 million to RM50 million has been invested for the glove business. In contrast to the initially planned 10 production lines, the company will only kick-start two lines with an annual production of 500 million pieces per year in the near term, ensuring that the new business will not operate at a loss.

Goh says the delay in the commencement of its glove production was due to difficulty in getting machines as its suppliers were hit by Covid-19. The company is in the final stages of validating the production lines and pending certifications from a few countries.

“We believe that the glove market will come back. It is a business for the long term,” he says, adding that part of the space for glove operations is being used for condom expansion.

Karex has no plans to raise funds at the moment as its expansion plans will be funded by internal funds and bank borrowings. As at end-September, it was in a net debt position of RM119 million, with RM145.4 million in gross borrowings. Its gearing ratio stood at 0.26 times.

“Our balance sheet remains healthy. So there is no need for us to go out to raise money,” Goh says. The Goh family, via private vehicles Karex One Ltd and Maryen Holdings Ltd, has a 29.02% stake in Karex. Goh also directly owns 4.62% of Karex shares.

CGS-CIMB Research in a Nov 8 note upgraded Karex to an “add” call from “hold”, with a higher target price of 72 sen, noting that the group had finally turned the page, backed by multiple tailwinds in the operating environment and recent increases in selling prices.

The research house also raised Karex’s FY2023 to FY2025 earnings per share estimates by 80% to 103%, expecting a return to the black in FY2023, on the back of higher sales from the sexual wellness division, lower input costs, weaker ringgit and higher economies of scale.

Its net profit forecasts for FY2023 to FY2025 are RM13.76 million, RM25.19 million and RM38.04 million respectively.

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