Karex: Indisputable World Leader?

Karex Berhad will be tentatively listed in Bursa KLCI on the 6th of November 2013. It will raise RM75 million through public issue of 40.5 million new shares at RM1.85 each.

Better known as world's largest condom manufacturer, Karex started its business back in 1988 in Johor. Besides condom, it also manufactures other rubber-based medical devices such as probe covers, sterile catheters, rubber gloves and lubricating jelly. However, condom sales contribute to about 90% of its total revenue.

Karex's condoms are sold in commercial, tender and OBM (own brand manufacturing) markets, which makes up 59.7%, 36.1% and 4.2% respectively for FY2013 ended 30 June 2013.

Its commercial customers include Ansell (Lifestyle brand), Reckitt-Benckiser (Durex brand), Line One (Trustex brand) & Global Protection (One brand). The tender market is tendered to institutional buyers such as NGOs and government agencies. 

Karex's own condom brand Carex and INNO are mainly distributed in Singapore, UAE, South Africa, India, Bangladesh and Nigeria.

Karex currently has 3 factories at Pontian, Port Klang and Hat Yai. Manufacturing facilities in Hat Yai commenced operation in 2006 and will receive 13 years of tax incentives for condoms manufactured there. It will enjoy 8 years 100% tax free (2006-2013) and 5 years 50% tax exemption (2014-2018). This means it will start to pay some tax next year.

How big is the condom market and does Karex has a competitive edge?

According to research, global condom sales increase from 16.2 million in 2007 to 22.8 million in 2012, representing a CAGR of 7.1%. It is estimated that 51.9% of sales are derived from commercial market and 48.1% are from institutional buyers.

For year 2011, Malaysia is the second largest condom exporter in the world (18.9%) after Thailand (23.8%) in term of sales. In term of weight, Malaysia is the world largest condom exporter with 12,450 tonne in 2012, followed by Thailand (10,600 tonne).

Karex is said to enjoy 10% of global market share in condom manufacturing.

In its homeland Malaysia, Karex is the clear leader in condom manufacturing with other closest competitors miles behind in term of revenue, profit, margin and market share. In 2012, Karex exported 7,600 tonnes of condom, which represents a market share of 60.8% in Malaysia condom export market.

       Karex: No.1 in Malaysia

In term of annual manufacturing capacity, Karex with 3.0 billion pieces per year is the world leading condom manufacturer. It still plans to double its capacity to 6 billion pieces by year 2015!

       Karex: No.1 in the world

For FY2013 ended June, Karex manufactures 2.4 billion pieces of condoms, representing a utilization rate of 80%. Thus, plans to ramp up its manufacturing capacity by acquiring new factory and installing new lines in Klang and Hat Yai have been on-going, and are expected to be completed by end of 2013. Besides, it also plans to move its main facility in Pontian to a larger 18 acres site nearby in 2014-2015.

Besides expansion of manufacturing capacity, Karex will introduce further automation in its manufacturing process to increase efficiency and reduce manpower. In the near future, Karex will expand its own brand market which can give better profit margin. Who knows it may diversify into other rubber-based products in the future?

	RM mil	2010	2011	2012	2013
	Revenue	157.4	181.7	188.8	231.4
	PAT	16.5	7.0	12.0	29.0
	PAT margin	16.8	3.9	6.4	12.5

       Karex recent financial results

From year 2011 to 2013, Karex's net profit and profit margin increase tremendously. However, I am not sure why its margin in year 2010 was so high.

Before IPO, its total borrowings stand at RM50.8mil while it has RM41.3mil of cash. It will be a net cash company after listing.

With total shares of 270 million, net profit of RM29 million in 2013 (ended June13) and IPO price of RM1.85, Karex's EPS and PE ratio will be 10.7sen and 17.3x respectively. 

Currently its net profit margin of 12.5% is considered quite good in manufacturing and may have little room for improvement I think. Thus base on its previous year 23% increase in revenue, we can conservatively estimate a 23% increase in net profit for year 2014, which will be RM35.7 million. At this profit, its estimated PE base on IPO price will be 14.0x  in 2014.

If Karex can maintain its profit growth of 2012-2013 (140%), then it will be excellent.

Karex does not have fixed a dividend payout policy. If it pays 50% of net profit in 2013 as dividend, this will be 5.4 sen per share, or 2.9% dividend yield at RM1.85. 

Karex is a world leading condom manufacturer, with healthy balance sheet and good financial results. It is aggressive in expansion as well. However, at RM1.85, do you think it is a fair price to invest? I would prefer to know its FY2014 Q1 result first (July-Sep 2013).