KAREX: Resilience in Challenging Quarter as Strategic Growth Plans Advance
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
AmInvestment Bank has maintained its “BUY” recommendation for the company, citing strong growth prospects driven by new product developments, particularly in synthetic rubber condoms. The investment bank has set a target price of RM1.05, based on a target price-to-earnings (PE) ratio of 23x applied to its CY27 EPS forecast. This valuation aligns with the stock’s median forward PE since its IPO and its peers’ five-year mean PE.
Performance Review
The first quarter of FY26 saw core net profit decline by 38% year-on-year to RM4.0 million. This performance was broadly in line with AmInvestment Bank’s internal forecast, accounting for 19% of their full-year estimate. However, it fell short of consensus estimates by 13%. Despite the year-on-year dip, the investment bank anticipates a sequential improvement in the coming quarters.
The quarter was impacted by a “triple whammy” of headwinds, including unfavorable foreign exchange movements, a RM2.1 million tariff impact on exports to the United States, and a significant 41% decline in revenue from condom and personal lubricant sales within the tender market. The latter was primarily due to reduced donor funding.
Strategic Growth and Outlook
Despite the challenges, the synthetic condom segment emerged as a key profit contributor, mitigating some of the negative impacts. This segment accounted for 13% of total revenue and a substantial 20-25% of gross profit during the quarter. Revenue from synthetic condoms surged by 40% quarter-on-quarter to RM18 million, while maintaining a robust gross margin of 50%.
Looking ahead, the company’s nitrile condom expansion plan remains firmly on track. This initiative involves the addition of 10 new production lines, scheduled for completion by mid-2026. This expansion is expected to lay the foundation for a new structural growth phase. AmInvestment Bank forecasts a gradual improvement in synthetic condom sales as utilization rates pick up and tender sales normalize, given their historically lumpy nature.
