Karex to see earnings recovery from OBM and gloves, says HLIB

KUALA LUMPUR (March 16): Hong Leong Investment Bank (HLIB) Research expects Karex Bhd’s earnings to recover versus lows in the financial year ended June 30, 2020 (FY20) from a sales shift back to the lucrative own brand manufacturing (OBM) channel and commencement of glove manufacturing.

HLIB analyst Gan Huan Wen said in a note today that he met with Karex recently and came away feeling positive on the group’s prospects going forward.

Gan added that the management claimed that since condom selling prices fell by about 30% to 40% since FY17, prices had nearly fully recovered.

Karex also shared that it had incurred higher costs in FY21, including raw material costs which had risen considerably, freight costs which had more than tripled and spending incurred to curb the spread of Covid-19.

“We gathered that Karex was able to pass on the higher costs to customers due to overall lower market supply as a number of smaller players in the market saw operational difficulties during the pandemic or have exited the market altogether,” said Gan.

Meanwhile, Karex is on track to begin production of medical gloves in July 2021, with two production lines expected to produce up to 40 million pieces per month by August.

“Note that our glove FY22/23 average selling price (ASP) assumptions for Karex of US$35 (RM144.04)/US$27 are below other glove counters under our coverage as we reckon Karex may not be able to achieve the pricing of their established counterparts, considering they are a new entrant in the industry,” said Gan.

Gan also noted that vaccine roll-outs in the US and the UK should lead to a rebound in Karex’s OBM sales.

Citing Karex, he said its sales to the OBM market shrank to 10% of sexual wellness sales in the second quarter ended Dec 31, 2020 (2QFY21) from 18% in FY20 due to lesser sales in the US and UK.

“With the roll-out of vaccines in the US and UK gaining traction, we expect OBM sales to rebound in FY22,” said Gan.

Gan also noted that Karex intends to grow its OBM sales in Southeast Asia as economic development would shift sales in these regions from tender to original equipment manufacturing (OEM)/OBM.

According to Gan, a high proportion of condom sales in developing Southeast Asian nations (the Philippines and Indonesia) currently are purchased by non-government organisations (NGOs) and organisations (the tender market) to be distributed for free in order to curb the spread of sexually transmitted diseases.

“As these countries modernise, funding for these organisations is expected to be reduced, which would in turn lead to consumers buying condoms on the commercial market independently. This would shift sales from the tender channel to OEM or OBM,” said Gan.

According to Gan, gross profit margins are significantly better for OEM (about 20%) and OBM (>45%) compared to tender (10%-12%).

After factoring in additional earnings from Karex’s glove venture, Gan increased his FY22/23 forecasts by 26.8%/22.1% for Karex.

He, however, kept his FY21 forecast unchanged as glove production is only expected to begin in FY22.

He maintained his “buy” call on Karex, with an unchanged target price (TP) of RM1.19.

At 10.02am, Karex was unchanged at 65 sen, valuing the group at RM684.75 million.

Source: TheEdgeMarkets