IT is not difficult to imagine how the advent of global lockdowns coupled with social distancing to contain the COVID-19 pandemic can have on the world’s largest condom maker Karex Bhd.
For its 2Q FY6/2022, Karex reported a core net loss of RM2.6 mil, excluding one-off losses of RM200,000 (inventory write-off), according to CGS-CIMB Research.
This brought its 1H FY6/22 core net loss to RM1.4 mil from core net profit of RM9.9 mil in 1H FY2021 – missing the research house’s expectations of RM4 mil profit in 1H FY6/2022 – due to lower sales volume, increases in input costs and a spike in operating expenses.
“(Karex’s) 2Q FY6/2022 revenue rose 7.8% quarter-on-quarter (qoq), thanks to higher condom sales, especially from the tender segment,” observed analyst Walter Aw in a results review.
“However, 2Q FY6/2022 EBITDA margins declined to 2.8% (-4.6 percentage points qoq), owing to (i) less profitable sales mix (tender orders have lower margins); (ii) higher input costs (especially silicone oil); (iii) higher operating costs (distribution expenses, COVID-19 related costs, etc).”
Nevertheless all is not bleak for Karex in the days ahead as CGS-CIMB Research anticipates demand for condoms to increase in tandem with the lifting of lockdown measures locally and the gradual relaxation of social measures globally.
“Karex is already seeing an increase in orders (estimated to be a 20-30% increase in orders in 2H FY6/2022,” projected the research house.
“On top of that, Karex is constantly undertaking price hikes to pass on higher operating costs (raw material and freight costs) which will continue to take place. Hence, we expect Karex to report stronger results in 2H FY6/2022F as we believe that the worst is over in 1H FY6/2022.”
Moving forward, CGS-CIMB Research said Karex plans to begin trial runs for two dipping lines (total 420 million pieces/annum) for its maiden glove plant in Thailand in 3Q FY6/2022.
“Sales contribution from its glove segment should kick in towards 4Q FY6/2022F,” opined the research house. “However, we believe that Karex is likely to break even at best for its glove business in the initial stages given the current weak operating environment (declining average selling prices and rise in global glove production capacity).”
All-in-all, CGS-CIMB Research reiterated its “hold” rating on Karex with a lower target price of 40 sen (from 43 sen previously).
“While we expect stronger results in quarters ahead, we expect the group to post losses in FY6/2022 (second financial year in a row) which justify our current valuations of 0.9 times P/BV (price-to-book value),” added the research house.
At the close of today’s mid-day trading, Karex was unchanged at 40 sen with 1.58 million shares traded, thus valuing the company at RM416 mil. – Feb 22, 2022
