Company Update

• Comfort Gloves Bhd (CGB) has announced that its wholly-owned subsidiary, Comfort Rubber Gloves Industries Sdn Bhd (CRGISB) has been removed from the US Food and Drug Administration’s (FDA) import alert list (or “red list”) in a letter from the FDA on 27th November 2018.

• To recap, CRGISB was included in the red list on 15th March 2018 due to violations of the FDA regulations. Although its inclusion did not prevent the group from exporting its examination gloves to the U.S., the products was required to pass inspections before it can be released into the country. Further, relevant authorities are also allowed to detain all future shipments from the manufacturer/shipper listed in the alert list without testing.

• We are positive on the latest development as the group has been petitioning for its removal from the FDA list since July this year. However, we leave our forecasts unchanged for now, ahead of CGB’s 3QFY19 results announcement next month, as we have already expected that the exports to the U.S. will resume in FY20 following the acquisition of Pacewell on 31st October 2018.

• The group’s net profit and revenue is expected to grow at a five-CAGR rate of 9.9% and 21.9% to RM34.3 mln and RM475.8 mln respectively by FY20.

Prospects

With its removal from the FDA import list, CGB could potentially see its bottomline margins return to the range of 7%-10%, from 5.3% in 1HFY19 due to the absence of additional costs related to the FDA inclusion (i.e.: logistics costs, compliance costs, legal costs).

However, we are aware that recurring violations in the future will subject CRGISB to more intensive scrutiny by the FDA, which could prompt even more comprehensive proofs and extensive time to discharge its import detention status. For example, if CRGISB is found with another violation within 24 months from the date it was removed from the FDA Level 1 detention, the company could be placed on Level 2 detention, where the removal petition process will be lengthier compared to Level 1.

On that note, the group’s acquisition of Pacewell will allow CGB to own an additional FDA license that would mitigate future business risk and ensure smooth supply to its U.S.-based customers, moving forward.

Valuation and Recommendation

We maintain our BUY recommendation on CGB with an unchanged target price of RM1.10 by ascribing an unchanged PER of 18.0x to its FY20 EPS of 6.1 sen as we think a recovery is due for CGB in FY20, backed by improved margins, higher production utilisation rates and stronger Greenback.

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. Downside risks to our call include sudden spikes in rubber prices, appreciation in Ringgit and oversupply in the rubber gloves industry, which could dampen ASPs.

Source: Mplus Research - 29 Nov 2018