Investment Highlights

• We initiate coverage on Comfort Gloves Bhd (CGB) with a BUY recommendation and a target price of RM1.30. We like that CGB has solidified its unique position as a niche player in the natural and synthetic specialty examination gloves segment. By leveraging on its smaller and leaner structure, CGB is able to cater to bespoke orders from customers, providing a competitive edge and potentially higher margins, compared to other larger glove players. Currently, the group has more 300 products (excluding custom-made orders). 
• Its growing size is also a reflection of CGB's sustained capacity expansion (+20.0% -30.0°%o from FY15-FY17) and rising operational efficiency amid continuous upgrades to its production capacity. The group has two manufacturing facilities located in Matang and Simpang, Perak, consisting of 40 production lines and is expected to ramp-up its capacity to 48 lines by FY18, churning close to 5.0 bin pieces of gloves annually upon full commissioning. Meanwhile, future plans include establishing manufacturing facilities in Indonesia, Thailand and Vietnam. 
• FY19 EBITDA and revenue is expected to reach RM56.2 min and RM415.4 min at a three-year CAGR of 25.1% and 21.8% respectively. Net profit, meanwhile, is estimated to hit RM42.8 min in FY19, driven by growing production capacity, higher sales volume and increased operational efficiency. Continuous cost management initiatives are also expected to contribute positively to CGB's bottomline. 
• We arrive at our target price by ascribing a target PER of 17.0 x to its forecast FY19 EPS of 7.7 sen. The assigned PER is at a discount to industry bellwethers like Hartalega Holdings Bhd and Top Glove Corporation Bhd, which is fair due to CGB's smaller capacity and market capitalisation. Further re-rating catalyst could arise from higher-than-expected production growth and stronger ASPs. 

Recommendation

Being significantly smaller size compared to Hartalega and Top Glove, CGB does not aim to compete with the giant players, but rather to differentiate itself via its specialisation in supplying premium specialty gloves. By catering to personalised orders from its customers, CGB has created a niche client base for itself, which we think will serve them well, considering the highly saturated rubber gloves industry. Its smaller stature will also allow the group to have a more lean structure, flexibility and adaptability to keep its business efficient. Todate, CGB has a wide range of product offering including surgical, clean-room and household gloves, with over 300 types of product offered.

We also like the group’s proven profit track record and positive growth trajectory, which will be underpinned by resilient demand for nitrile gloves - in tandem with rising global healthcare awareness and reforms, as well as continuous production upgrades and capacity expansion by CGB. Running close to its maximum capacity, we forecast production capacity to grow 17%-20% in FY18 and FY19.

Its experienced management team, helmed by Managing Director (MD) Mr Cheang Phoy Ken – a veteran in the rubber glove manufacturing industry with over 20 years of experience working with Disposable Medical Product Inc, Pacewell Asia and Seal Polymer Industries Bhd. Mr. Cheang’s involvement in the group has allowed the group to stretch its revenue growth rate at a three-year CAGR of 25.0% from FY14-FY17. Consequently, we believe that his leadership and outstanding team of managers will be a key force in maintaining CGB’s positive momentum growth going forward.

The group also has a solid balance sheet, being in a net cash position for the last four years, due to minimal borrowings and increasing earnings. This indicates strong financial stability and prudent cash management which will support the group’s expansion plans, as well as weather any unforeseen cash flow setbacks.

Investment Risk

Risks to our recommendations include rising cost of raw materials like nitrile butadiene rubber (NBR) and natural latex rubber (NR) - key ingredients used in CGB’s rubber gloves making process, which could squeeze margins amid mounting input costs.

CGB is exposed to foreign exchange fluctuation risk, given that both the sales and raw material costs are denominated in U.S. Dollars, any fluctuations in USD/MYR exchange will impact on the group’s earnings. We expect the management to pass-through the additional costs to its customers, thus reducing the risk.

Intensifying competition will continue to pressure the ASPs as seen in previous years. Meanwhile, the ever increasing production costs (electricity and gas) will also be an obstacle to its margin expansion.

Finally, labour issue like minimum wage hikes or foreign labour bans could also potentially disrupt CGB’s daily operations, although we do not foresee this to manifest in the current juncture after the government lifted its ban on foreign workers hiring for the manufacturing sector in May 2017. We also expect continuous upgrades and automation to reduce the risk of labour shortage issues.

Source: Mplus Research - 11 Dec 2017