Kenanga Research has upgraded Karex Berhad to Outperform and raised its target price by 11% to 59 sen from 53 sen, as improving margins and rapid growth in its synthetic condom business point towards a stronger earnings recovery in FY27.
The research house said Karex’s FY26 net profit of RM300,000 was within its expectations but ahead of market consensus, with the key positive emerging from a sharp margin recovery in the final quarter.
Karex’s gross profit margin (GPM) rebounded to 38% in 4QFY26 from 27% in the preceding quarter, despite revenue declining 4.2% quarter-on-quarter to RM101.2 million.
The improvement was partly supported by US$2.1 million in US tariff refunds. Excluding the refund, Kenanga estimated Karex’s normalised GPM at about 30%, which it said still pointed to an improving underlying earnings trend as price increases gained traction and freight and raw-material cost pressures began stabilising.
Karex returned to a net profit of RM3.8 million in 4QFY26, reversing a RM6.4 million loss in the preceding quarter.
For the full year, revenue declined 7.2% to RM462 million, primarily due to weaker demand from the institutional tender market following cuts in humanitarian aid funding, adverse foreign exchange movements and logistics disruptions linked to tensions in the Middle East.
Despite the weaker topline, Karex remained marginally profitable, recording FY26 net profit of RM300,000, slightly higher than the previous financial year.
Synthetic Condoms Emerging As Key Growth Driver
Kenanga highlighted Karex’s synthetic condom business as one of its most important growth catalysts, with sales more than doubling year-on-year in FY26 to exceed US$6 million.
The product is now sold in 21 countries, providing Karex with an increasingly meaningful new revenue stream as the group shifts towards higher-value products.
Management plans to launch its synthetic condoms in another nine countries during FY27, with India, Brazil, Mexico and Thailand among its near-term target markets.
China could also be added to the list, subject to final regulatory approval.
Karex is also preparing an improved “Version 2” of the product after incorporating consumer feedback, including refinements to sizing and other product features.
Kenanga said the average selling price (ASP) for the new version is expected to be between 5% and 10% higher than the first-generation product.
The research house said regulatory approvals and product validation had constrained the speed of expansion during FY26, but continued market launches could drive further growth in both new and existing markets.
More Price Increases To Flow Through FY27
Another key component of Karex’s earnings recovery is its ongoing selling-price adjustments aimed at offsetting the impact of a weaker US dollar and elevated operating costs.
Price increases negotiated progressively between April and June 2026 have yet to be fully reflected in reported earnings, meaning the full benefit should carry into FY27.
Further price adjustments are also expected during the year.
According to Kenanga, the increases vary according to customers and products rather than being implemented uniformly. Management indicated increases of about 10% to 30% in certain cases, although some customers require the adjustments to be introduced more gradually.
Kenanga expects the combination of stronger pricing, manufacturing optimisation and an improving product mix to support profitability even if overall sales volumes remain subdued.
FY27 Seen As Margin-Led Recovery Year
Management remains cautious on the FY27 operating environment amid geopolitical uncertainty, foreign exchange volatility, elevated raw-material and logistics costs and persistent weakness in the institutional tender segment.
Nevertheless, Karex expects profitability to improve gradually, supported by the full-year impact of its selling-price increases, further scaling of synthetic condom sales, entry into new markets and stronger contributions from commercial customers and its own-brand manufacturing (OBM) segment.
Kenanga therefore expects FY27 to be driven more by margin recovery than a broad-based rebound in sales volumes.
It identified the execution of Karex’s synthetic condom expansion and the sustainability of its selling-price increases as key swing factors for earnings.
Reflecting the stronger margin outlook, Kenanga raised its FY27 net profit forecast by 11% to RM25 million and lifted its GPM assumption to 31.1% from 29.3%. It also introduced its FY28 earnings forecast.
The research house correspondingly increased its target price to 59 sen, based on an unchanged FY27 forecast price-to-earnings ratio of 25 times.
The valuation represents a 20% premium to the five-year average forward PER of Karex’s international peers, which Kenanga said was justified by the group’s dominant market position and growth prospects.
Kenanga said its investment case is underpinned by Karex’s leading position and global reach in a condom industry expected by industry experts to grow at an annual rate of between 8% and 9% over the immediate term.
It also cited the group’s research and development capabilities, product innovation, international certifications, strategy of moving up the value chain and evolving consumer preferences towards higher-quality and innovative products.
Downside risks include further reductions in government spending on birth control programmes, weaker-than-expected demand for Karex’s synthetic rubber condoms, an unfavourable product mix and an inability to implement sufficient price increases to protect margins.
