Results Review

• Comfort Gloves Bhd (CGB) recorded a whopping 54.8% Y.o.Y drop in its 2QFY19 net profit to RM4.1 mln, compared to RM9.1 mln in the previous corresponding period, dragged down by a one-off logistics expense of about RM4.4 mln. Revenue also weakened slightly by 4.2% Y.o.Y to RM109.8 mln, from RM114.6 mln in the same quarter last year.

• Meanwhile, cumulative 1HFY19 net profit also thinned by 40.4% Y.o.Y to RM11.4 mln, from RM19.2 mln previously – due to weaker EBITDA margins that were affected by the aforementioned logistics costs, higher raw materials prices, utility expenses and the weaker Greenback. Revenue, however, was marginally stronger at RM216.4 mln (+3.9% Y.o.Y), from RM208.3 mln in 1HFY18.

• The group’s normalised net profit, however, was within our expectations, making up 52.3% of our previous full year estimated net profit of RM30.3 mln. Revenue was also in-line and accounted for 51.6% of our forecast of RM419.1 mln. The one-off logistics expense above could have been incidental costs due to restrictions slapped by the U.S. FDA. Consequently, we trim our FY19 net profit by 15.2% to RM25.7 mln after taking into consideration the thinner margins, but increase our revenue forecast slightly to RM435.9 mln (+4.0%) on the strengthening U.S. Dollar. Meanwhile, FY20’s net profit and turnover was also adjusted higher by 11.5% and 4.0% to RM34.3 mln and RM475.8 mln respectively.

• Separately, the group has proposed to acquire the entire stake in Pacewell Asia Sdn Bhd for RM150,000 in cash, in a bid to acquire an additional FDA license which will allow it to immediately export medium-risk medical device (i.e.: rubber gloves) to the U.S. The acquisition is expected to be completed before 31st October 2018.

Prospects

We think that the upcoming quarters should see the group resuming its earnings growth trajectory as we do not see the high logistics expense, which dragged down the 2QFY19 results, to recur as the company moves to resolve its exports to the U.S.

As it is, utilisation remains at high levels of around 85.0%-90.0% across its production floor, indicating resilient demand for CGB’s rubber gloves. In the meantime, the group is still awaiting approval from the U.S. Food and Drug Administration’s (FDA) in relation to its removal from the FDA red list.

We are positive on Pacewell’s acquisition as it possesses a 510(k) FDA license that will enable the group to immediately export its products to the U.S. without having to apply for a new license and also to mitigate its business risk by securing an additional FDA license.

On the expansion front, CGB is also planning to increase its production capacity and construct a new warehouse on a 39-ac. leasehold land in Daerah Kinta, Perak previously acquired.

Moving forward, we expect revenue growth to remain steady, in-view of higher feedstock prices (i.e.: nitrile butadiene and natural rubber) resulting from weather issues and lower production from major rubber suppliers, as well as the strengthening Greenback, although upsides could be capped by the ongoing geopolitical concerns and the slow recovery in the automotive industries, which is the major consumer of synthetic rubber.

Meanwhile, the increasingly stringent U.S. medical regulations could also support the growth of the rubber gloves industry. We note that the USP 800 guidelines from the U.S. Pharmacopeia (USP) Convention – the best practices standard for pharmacies and hospitals recommended health workers to don two pairs of gloves while handling hazardous drugs, is expected to take effect from December 2019. We see the increased usage benefitting the demand for rubber gloves with CGB becoming a direct beneficiary in due course.

Valuation and Recommendation

We maintain our HOLD recommendation on CGB with a higher target price of RM1.05 (from RM0.92) after rolling over our valuations to FY20. Although we are positive on the proposed acquisition of Pacewell, it remains uncertain at this point if the proposed acquisition will significantly impact CGB’s performance in the near-term, thus we opted to keep our existing call on CGB. We are still confident on CGB’s recovery, which will be underpinned by resilient demand for rubber gloves worldwide and its ongoing capacity expansion.

Our target price is arrived by ascribing a higher target PER of 18.0x to its FY20 EPS of 6.1 sen following the appreciation in the share price of its peers. 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 - 1 Oct 2018