Tough times at Karex

KAREX Bhd, the world’s largest condom maker, has seen better times.

Listed in 2013 on Bursa Malaysia with a market cap of Rm500mil, the company’s shares performed well and reached Rm2.42bil by 2016.

Those were the good days when its products sold well and profits peaked.

It’s share priced reached an all time high of RM3.06 in January 2016, compared with its paltry 43.5 sen a piece.

Since FY17, Karex has seen its profits take a dip.

Analysts who were previously bullish on the stock have downgraded the stock to a “sell” or ceased coverage.

All six research houses currently covering Karex have issued “sell” or “underperform” calls on the stock.

Big funds are also seen to be getting out of the stock.

According to Bursa Malaysia filings, two funds ceased to be substantial shareholders of Karex this month – Standard Life Aberdeen PLC and Aberdeen Asset Management PLC.

Things seem to look gloomy for Karex at this point in time, with no near term upsides in sight.

The group registered a net profit of Rm2.53mil for its financial year ended June 30, 2019 (FY19), which was a staggering 75% drop as compared to the previous financial year’s net profit of Rm10.1mil.

This was on the back of a 6.9% year-onyear decline in revenue to Rm379.9mil, mainly due to lower sales from the Sexual Wellness segment.

In a Bursa Malaysia filing, Karex also noted that its profitability during the fourth quarter of FY19 was pressured down by higher raw material prices as well as a payment for social compliance costs.

To recap, since 2017, Karex has faced a decline in global tender pricing.

The tender market is mainly to supply condoms to government and non-governmental organisations, which is a key part of Karex’s business model.

Affin Hwang Capital believes that Karex’s sales during the fourth quarter of FY19 was

We believe that it would take Karex at least six to 12 months to recover from the loss in sales.

Affin Hwang Capital

impacted by the allegations of the mistreatment of its workers.

Karex has since made several changes to its staff remuneration and improved the accommodation of its migrant workers.

“Independent audits were only completed recently.

“Although some of the buyers have started repurchasing, some of its major clients have not complete their internal social audits on Karex.

“As such, we believe that it would take Karex at least six to 12 months to recover from the loss in sales,” says Affin Hwang Capital in a recent research report.

The research house adds that Karex is aiming to reduce its labour dependency by 50% within the next three years, given the increasing labour costs.

Despite the lower profitability during the fourth quarter, Karex’s net cash increased to Rm30mil as at end-fy19, as compared with Rm9mil in the first quarter of FY19.

Affin Hwang Capital says the improvement in net cash is due to Karex’s implementation of new credit controls since the third quarter of FY19, which has successfully reduced its trade receivables.

Going forward, Karex has warned that the industry still faces “shifting trends in condom purchasing patterns and uncertainty surrounding humanitarian aid budgets around the world”.

It also says that erratic raw material prices and the rising cost of social compliance remain major challenges.

Karex though, intends to leverage on its cost advantages through automation and investments into its branded segment.

It is left to be seen if this will be sufficient to get the company out of its doldrums.