CGS-CIMB Research keeps ‘Hold’ call on Karex despite weak 3Q earnings outlook

by ANIS HAZIM / pic by AFP

CGS-CIMB Securities Sdn Bhd (CGS-CIMB Research) expects Karex Bhd’s sales of condoms to recover in the months ahead supported by the lifting of lockdown restrictions globally and new customer acquisitions.

Analyst Walter Aw noted Karex has seen a gradual pick-up in demand for condoms in its third quarter period ended March 31, 2022 (3Q22), from customers across all segments including commercial, tender and own-brand due to the easing of lockdown.

“We gather Karex recently secured several new customers, especially in the commercial segment,” Aw said in a research note on Karex recently.

Karex previously estimated global demand for condoms declined by up to 40% year-on-year over the past two years due to lockdown restrictions to combat the spread of Covid-19 and the suspension of condom handout programmes by government bodies.

The CGS-CIMB Research report stated Karex is still seeing production disruptions leading to lower output as utilisation rate in 3Q22 was estimated at 55% to 60% compared to 65% to 70% in the pre-Covid-19 period.

“This is a result of issues such as positive Covid-19 cases among employees, freight delays (for shipment of raw material) and labour shortages,” Aw added.

Nevertheless, Karex is confident of raising its production output from 4Q22 onwards, backed by fewer Covid-19 restrictions.

Karex, meanwhile, has been increasing its selling prices gradually mainly for customers in the commercial and tender segments as a result of rising input costs.

“We expect Karex’s margins to remain under pressure in the near term as we believe the quantum of rising in selling prices is insufficient to fully offset the continuous surge in key input costs such as silicone oil and freight delivery charges,” he explained.

For Karex’s upcoming 3Q22 results, the brokerage expects the company to report a loss due to higher input costs and production disruptions. 

“Nevertheless, we believe the worst would be over in 3Q22 before a return to the black from 4Q22 onwards backed by higher production volume, further selling price hikes and higher economies of scale,” he noted.

CGS-CIMB Research made no changes to Karex’s FY22-FY24F earnings per share estimates and reiterate its “Hold” call and target price of 40 sen given its market position as the world’s largest condom producer by volume, continuous research and development of new condom-based products and its growing own-brand segment. 

Karex was last traded at 38.5 sen a share yesterday.