Results Review

• Comfort Gloves Bhd’s (CGB) posted a 14.5% Y.o.Y increase in its 1QFY20 net profit to RM8.4 mln, compared to RM7.3 mln in 1QFY19, on the back of higher sales volume. Revenue was also 12.5% Y.o.Y higher at RM120.0 mln, from RM106.6 mln in the previous corresponding quarter.

• The latest earnings were in-line with our previous forecast, coming in at 28.0% of our full-year net profit, while revenue accounted for 27.7% of our previous forecast.

• Despite the results coming in as expected, we adjusted our net interest expense following higher borrowings and increased revenue after including an additional six production lines by end-2019. Subsequently, we lift our FY20-FY21 net profit forecast by 8.2%-9.1% to RM32.5 mln and RM36.5 mln respectively. Revenue was also increased by about 6.0% to RM458.4 mln and RM479.9 mln for FY20 and FY21 respectively.

• Downside risks to our forecast include slowing global economies due to ongoing U.S.- China trade conflicts that could result in volatilities in latex prices and higher financing costs as we saw a higher gearing of 0.3x in FY19. Previously, CGB has been in a net cash position for the past five consecutive years.

Prospects

Moving forward, we expect to see a slight increase in latex prices, in-tandem with the lower global production estimates and export cuts by key regional producers in 2019. Consequently, CGB could potentially adjust ASPs higher as CGB passes-on the higher costs, which combined with resilient demand for rubber gloves, will result in stronger sales.

Additionally, the stronger U.S. Dollar will also benefit exporters like CGB due to translation gains. Average MYR/USD weakened to RM4.094/US$1.00 (-4.7%) from February –April 2019, compared to RM3.901/US$1.00 last year.

Expansion-wise, we expect CGB to add six new lines by end-2019. As of FY19, the group has about 49 production lines after including six new lines which has brought total gloves capacity to more than 5.0 bln per year.

We also continue to like the premium pricing that CGB commands due to its niche factor. As such, we foresee much improved margins in FY20, on the back of stronger ASPs and higher sales volume. The group’s balance sheet also remains robust despite higher borrowings at 0.3x, which is still healthy, in our view.

Valuation and Recommendation

We upgrade our call on CGB to BUY (from Hold) with an unchanged target price of RM0.95, backed by higher capacity, increasing efficiency and bottomline recovery as the dust settles on the previous FDA issue.

Our target price is derived by ascribing to a lower target price of 17.0x (from 18.0x), which is in-line with the slight pullback in industry valuation and CGB’s four-year mean to its FY20 EPS of 5.6 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 - 25 Jun 2019