Results Review

• Comfort Gloves Bhd’s (CGB) 3QFY19 net profit fell 40.6% Y.o.Y to RM7.1mln, from RM11.9 mln previously, largely driven by higher selling and marketing as well as administrative expense. Revenue, however, improved 19.2% Y.o.Y to RM343.3 mln, from RM106.5 mln in 3QFY18.

• Cumulative 9MFY19 net profit also tanked 40.5% Y.o.Y to RM18.5 mln, from RM31.1 mln in the same period last year, despite a 9.1% Y.o.Y growth in revenue to RM343.3 mln vs. RM314.8 mln in 9MFY18. The weakness in its bottomline is mainly due to the one-off logistics expense in 2QFY19 and higher tax charges.

• The group’s performance was broadly within our expectations as net profit accounted for 72.1% of our estimated net profit of RM25.7 mln, while revenue made up 78.8% of our full-year forecast. We leave our forecast unchanged.

• We maintain our BUY recommendation on CGB with an unchanged target price of RM1.10 (about 23.4% upside) as our projections indicate bottomline recovery in FY20, underpinned by i.) resilient sales demand, ii.) ongoing capacity expansion, iii.) margins recovery and iv.) strengthening USD.

Prospects

After months of appeals to the US FDA, CGB has exited the FDA’s red list last month. We are positive on the news as it means that business will be able to run smoothly from now on, given that U.S. is one of the group’s key export markets. Further, the group has also acquired Pacewell, reducing its business risk as the latter also holds a FDA license that would allow the group to also export its gloves to the U.S.

Moving forward, we expect production utilisation to be maintained at the current levels of 85%-90%, owing to resilient demand for rubber gloves worldwide. Malaysia Rubber Glove Manufacturers Association (MARGMA) is forecasting a growth rate of about 15% per year over the next few years.

Meanwhile, lower natural rubber prices were offset by rising nitrile prices, resulting in slightly lower gross profit margins in FY19. Other potential contributing factors which could dampen margin moving forward include higher minimum wage and foreign workers levies from January next year. Even so, we think that bottomline growth is still intact due to the rising Greenback and economies of scale as well as strong sales orders.

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 the group’s growth prospects remains positive, underpinned by the recovery in its bottomline, stronger margins outlook and ongoing capacity expansion that will support sales growth.

The ascribed target PER remains at a discount to the PER of industry bellwethers like Hartalega Holdings Bhd and Top Glove Corporation Bhd due to CGB’s smaller market capitalisation and capacity.

Potential downside risks to our call include labour abuse allegations, after Top Glove was investigated for violation of workers’ rights amid rising awareness of labour rights. At this point, however, we are not aware of any such occurrence in CGB. Other risks, meanwhile, include unexpected fluctuations in latex prices and forex movements.

Source: Mplus Research - 19 Dec 2018