Results Review

• Comfort Gloves Bhd’s (CGB) 4QFY18 net profit tanked 41.5% Y.o.Y to RM4.8 mln, from RM8.2 mln in the previous corresponding period, dragged down by expenses related to its employees’ share option scheme (ESOS) of RM3.4 mln and provision for deferred tax amounting to RM5.2 mln. Revenue, however, jumped 46.2% Y.o.Y to RM106.4 mln vs. RM72.7 mln a year ago. The group has also proposed a final single dividend of 1.0 sen, which is subject to shareholders’ approval and will be payable on a date to be announced later.

• Cumulative FY18 net profit, however, added 38.8% Y.o.Y to RM35.9 mln vs. RM25.9 mln in FY17, lifted by stronger revenue contribution at RM421.2 mln (+60.2% Y.o.Y), from RM263.0 mln last year, as well as lower administrative expenses. Its bottomline was slightly dampened by higher tax and utility expenses, as well as a stronger Ringgit.

• CGB’s full year earnings came in broadly within our expectations at the pretax level. However, it missed our net estimates, accounting to only 87.8% of our full year net profit forecast. The difference was mainly due to: i) RM3.4 mln worth of shares awarded to CGB's staff and directors, and ii) provision for deferred tax up to RM5.2 mln in 4QFY18. Stripping the one-off expenses related to shares issued under the ESOS will bring adjusted net profit of RM39.3 mln closer to our estimate, at about 96.1% of our full year net profit forecast. Revenue for the year, meanwhile, outperformed our expected FY18 revenue by 7.4% (or RM29.0 mln).

• We foresee CGB maintaining its lean structure with a net cash of RM18.1 mln and low borrowings as at 31st January, 2018. We also maintain a positive view on CGB’s growth story, which will be underpinned by ongoing machinery upgrades and capacity expansion.

Prospects

We expect lower ASP in-tandem with the normalisation in rubber prices (Refer Appendix 1) and the Greenback. However, we think that Comfort’s fundamental growth is still intact, driven by the increasing topline, ongoing improvement in manufacturing efficiencies, product differentiation and resilient global demand for rubber gloves.

Meanwhile, China’s strict anti-pollution policies is still expected to stifle global rubber gloves supplies as smaller and inefficient manufacturers close down amid financial difficulties in coping with the new environmental regulations. We view this as a positive development for the industry as a whole, as it will keep rubber gloves prices steady at the current levels.

On the other hand, downside risks to our forecast include volatility in raw materials prices, higher gas tariffs and foreign currency fluctuations.

Valuation and Recommendation

We trim our FY19 net profit estimates by 6.9% to RM39.8 mln (from RM42.7 mln) after adjusting our tax assumptions. FY19 revenue forecast, however, was kept unchanged at RM439.6 mln. We also introduce our FY20 forecast net profit and revenue of RM42.8 mln and RM470.7 mln respectively following the closure of FY18.

Nevertheless, we maintain our BUY recommendation on CGB with a lower target price of RM1.20 (from RM1.30) by ascribing an unchanged PER of 17.0x to its revised FY19 EPS of 7.1 sen, owing to potentially higher tax expenses. 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.

Source: Mplus Research - 30 Mar 2018