Results Review

• Comfort Gloves Bhd’s (CGB) 4QFY19 net profit jumped 96.2% Y.o.Y to RM9.4 mln, from RM4.8 mln in the previous corresponding period, owing to a one-off ESOS writeback of RM2.3 mln and stronger sales volume. Quarterly revenue rose 22.7% Y.o.Y to RM130.6 mln, compared to RM106.4 mln last year.

• Despite the upbeat quarterly result, full year net profit fell 22.3% Y.o.Y to RM27.9 mln, from RM35.9 mln a year ago, weighed down by logistic cost (RM5.4 mln) and increased tax expenses. Revenue also increased 12.5% Y.o.Y to RM473.9 mln, from RM421.2 mln previously.

• The results matched our expectations with net profit coming in at 99.8% of our fullyear forecast of RM28.0 mln, although revenue exceeded our forecast of RM435.9 mln by 8.7% (or RM38.0 mln). We also take the opportunity to introduce our FY21 forecast net profit and revenue of RM33.5 mln and RM454.8 mln respectively.

• Meanwhile, we trim our expected full year FY20 net profit and revenue by 12.5% and 9.0% respectively as we foresee weaker ASPs moving forward, in-tandem with weak rubber prices as well as the depreciating Greenback after the U.S. Federal Reserve announced that there will not be any interest rates hike this year. Also, FY19 saw an unexpected jump in contribution from the trading division which is expected to moderate in FY20.

Prospects

Going forward, we expect lower ASPs amid the tighter competition in the already saturated rubber gloves sector and depreciation of the Greenback to limit revenue growth, although we foresee better margins ahead for CGB - driven by higher efficiency and progressive capacity expansion. We expect double-digit EBITDA margins from FY20-FY21 at around 13.0% vs. 11% in FY19.

Demand for rubber gloves, meanwhile, is expected to remain resilient, despite concerns of oversupply in the market as we think that manufacturers will likely pace their expansion to avoid an oversupply situation.

Expansion-wise, the group is planning to construct a new water treatment plant, a solar system, a warehouse and six production lines. We expect the group to have around 47 production lines running by FY21.

Valuation and Recommendation

We maintain our HOLD call but with a lower target price of RM0.85 (from RM0.90), albeit we remain cautious on the outlook for the gloves sector on the back of rising downside risks like the weakening USD, lower ASPs and tighter competition amongst global players. We believe its share price weakness over the past two months have more or less reflected the challenging operating environment.

Our target price is based on a higher target PER of 16.0x to our FY19 EPS of 5.3 sen. 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 - 27 Mar 2019