Results Review

• Comfort Gloves Bhd’s (CGB) 1QFY19 net profit fell 27.6% Y.o.Y to RM7.3 mln, from RM10.1 mln in 1QFY18 as the group made a provision for tax payable amounting to RM2.3 mln, which was not provided for in the previous corresponding period. In addition, higher input costs (+10.0% Y.o.Y) and natural gas tariffs (+17.0% Y.o.Y), as well as the weaker U.S. Dollar also weighed on earnings. Revenue for the quarter, however, rose 13.7% Y.o.Y to RM106.6 mln vs. RM93.7 mln in 1QFY18.

• The group’s reported revenue and earnings were within our expectations, accounting to 24.3% of our full year estimated net profit of RM30.3 mln, while revenue accounted for 25.8% of our FY19 sales target of RM419.1 mln. Therefore, we leave our forecast unchanged.

• On a Q.o.Q basis, its bottomline improved significantly by 53.6% from RM4.8 mln previously, owing to higher deferred taxation (4QFY18: RM5.2 mln) recorded in the last quarter, while revenue flatlined.

• Meanwhile, long-term earnings growth will be driven by: i) ongoing production expansion, ii) process rationalisation and efficiency strategies, iii) strengthening Greenback, and iv) resilient demand for rubber gloves. The group’s unique positioning as a niche premium speciality gloves manufacturer is an added competitive advantage amid the increasingly saturated nitrile gloves industry.

• Revenue is expected to grow at a double-digit three-year CAGR of 17.5% to RM426.7 mln, while net profit will increase at a CAGR of 8.4% to RM33.0 mln in FY19.

Prospects

The group continues to run at high average production utilisation level above 80.0% through 1QFY18, indicating that orders are resilient despite concerns of potentially lower sales after it was included in the U.S. Food and Drug Administration’s (FDA) alert list previously. On that note, the group is expected to submit the petition for its removal from the red list next month, with the result to be tentatively known by August this year.

Moving forward, future expansion plans include eight new production lines and a warehouse. The group has also recently announced its proposal to acquire a 39-ac. leasehold land in Daerah Kinta, Perak for RM13.2 mln cash, in-line with the group’s ongoing expansion plan.

Meanwhile, further strengthening of the U.S. Dollar and higher production volume will lend strength to the overall group performance, although earnings upside could potentially be capped by inflated natural gas tariffs and labor costs.

Rubber prices have also came off last year’s highs (Appendix 1) and is foreseen to normalise in the near-term, indicating a lower risk of unexpected cost fluctuations that could hit margins further.

Valuation and Recommendation

We maintain our HOLD recommendation on CGB with an unchanged target price of RM0.92. Even though we are positive on the group’s long-term earnings growth trajectory from its increasing capacity, we remain cautious on the current business environment which is riddled with trade and political uncertainties that could impact the group’s bottomline.

Its petition for its removal from the FDA red list, if successful, could help to alleviate concerns relating to its exports into the U.S.

Our target price is arrived by ascribing an unchanged target PER of 17.0x to its FY19 EPS of 5.4 sen. The ascribed target PER remain 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 - 28 Jun 2018