Results Review

• Comfort Gloves Bhd (CGB) posted a 43.6% Y.o.Y jump in its 3QFY18 net profit to RM11.9 mln, from RM8.3 mln previously, in-tandem with stronger revenue contribution (+43.9% Y.o.Y) at RM106.5 mln, from RM74.0 mln in the previous corresponding year.

• Cumulative 9MFY18 net profit, meanwhile, surged 75.9% Y.o.Y to RM31.1 mln vs. RM17.7 mln a year ago, boosted by ongoing capacity expansion and cost savings strategies. Revenue was also 65.5% Y.o.Y higher at RM314.8 mln, compared to RM190.2 mln in 9MFY17.

• The cumulative results came in within our expectations, accounting to about 76.1% of our forecast FY18 net profit of RM40.9 mln, while revenue accounted for 80.3% of our full year revenue at RM392.2 mln.

• CGB’s growing size reflects the group’s sustained capacity expansion (+20.0% - 30.0% from FY15-FY17) and rising operational efficiency on the back of continuous upgrades to its production capacity. Consequently, we expect CGB to add about eight additional production lines in FY18, which could increase CGB’s total capacity to an estimated 5.0 bln pieces of gloves annually upon full commissioning.

• FY19 EBITDA and revenue is expected to reach RM56.2 mln and RM415.4 mln at three-year CAGRs of 25.1% and 21.8% respectively. Net profit, meanwhile, is estimated to hit RM42.8 mln 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.

Prospects

Moving forward, we expect CGB to continue its positive growth momentum, underpinned by continuous capacity expansion and improvements initiatives such as upgrades to outdated production facilities. We also think that the group will continue to benefit from reduced supply of vinyl gloves from China, as well as the resilient demand for rubber gloves worldwide, although upside could be pressured by rising raw materials and energy costs.

The group is expected to construct a new warehouse and a production plant, which will see eight new production lines on-board. Full-year capacity utilisation rate is also expected to be above 60.0%, on the back of forward orders from product substitution due to supply shortages in China.

Valuation and Recommendation

With the results coming in within our expectations, we maintain our BUY recommendation on CGB with a target price of RM1.30 (unchanged) by ascribing a PER of 17.0x to its unchanged FY19 EPS of 7.7 sen. The ascribed target PER is at a discount to the PER of industry bellwethers like Hartalega Holdings Bhd and Top Glove Corporation Bhd, due to its smaller market capitalisation and capacity.

At the target price of RM1.30, CGB will trade at an implied PER of 14.1x on FY19 earnings, which is below the industry average of about 24.0x. However, we believe the lower valuation is fair in view of the group’s smaller capacity and market capitalization. Further re-rating catalyst could arise from higher-than-expected production growth and stronger ASPs, going forward.

Source: Mplus Research - 21 Dec 2017