OBM segment to drive Karex future earnings growth

KUCHING: Karex Bhd ( Karex) is banking on its own-brand manufacturing (OBM) segment to drive its future earnings growth.

Following a visit to the company’s factory in Thailand, Affin Hwang Investment Bank Bhd (Affin Hwang) in a report yesterday said Karex’s expansion of the OBM segment is set to enter a next structural growth phase, having successfully marketed its condom under the original equipment manufacturer (OEM) model, which is currently facing rising production costs and falling average selling prices (ASPs).

The research firm believed Karex’s OBM segment should scale up relatively fast over the next few years given the company’s inorganic acquisition trail and aggressive marketing push for its OBM brand known as ONE in greenfield markets.

The research firm forecasts that the group’s OBM segment is able to contribute 20 per cent to Karex’s topline by 2020 through an aggressive marketing push and expanding retail distribution network.

Affin Hwang opined that electronic commerce (e- commerce) sales could be another growth angle, as Karex begins direct access to end- consumers with the company’s set to launch an online platform, bypassing middlemen costs.

Besides that, the research firm expects further room for growth in the OBM segment led by an aggressive marketing push via a social media campaign and viral blog postings by prominent personalities or celebrities.

It opined that the expansion into the OBM space is a strategic move by Karex to enhance its earnings base.

From a structural value creation viewpoint, Affin Hwang believed the success in ramping-up its OBM segment could accelerate earnings growth for Karex over the medium term with superior profit margins.

Interestingly, Affin Hwang noted Karex has secured a distribution agreement with Walmart Stores Inc, the largest retailer in the US, in which the latter has agreed to allocate significant shelf space in 2017 to Karex to display its products.

Apart from that, the research f irm gathered that Karex’s market penetration has gained stronger footing especially in Malaysia and Singapore, with retail stores allocating visible shelf space for the ONE brand.

On another note, Affin Hwang said condom usage is set to enter into a new phase of structural growth with innovations in design and consumption to pique interest and promote acceptance.

“The usage of condoms is morphing from a perceived preventive medical device into a lifestyle pleasure device designed to improve uptake and regular use.

“Condom manufacturers are expanding the product range by introducing different variants and altering the general perception of the masses towards condom usage.”