Highlights

• Comfort Gloves Bhd is expected to record a better 3QFY20 bottomline on a sequential basis amid its ongoing capacity ramp-up and improved margins. In addition, pressure on the ASPs from the supply-demand imbalance in the earlier quarters is also expected to ease as glovemakers delay their expansion timeline to a later date in a bid to avoid severe oversupply.

• Meanwhile, long-term sales will be supported by resilient demand and potentially higher orders from the U.S. after the latter slapped import tariffs on Chinese-made rubber gloves. Consequently, the group is expected to record double-digit growth in its FY20 net profit, although revenue will see a minor decline in FY20 due to lower sales from the trading division.

• The group has paid out about 16.0%-30.0% of its profits as dividend in the last two years, which translates to a minimal dividend yield of 1.3%-1.9%. However, we did not include any dividend payout in our FY20 forecast as we concur that the group is likely to keep its cash reserves for expansion activities and working capital needs.

• We maintain our BUY recommendation on CGB with an unchanged target price of RM0.95 by ascribing to an unchanged target PER of 17.0x to its FY20 EPS of 5.6 sen, as we continue to like the group’s long-term growth prospects and healthy balance sheet.

Prospects

On a sequential basis, Comfort should see an improved net profit after recording three consecutive quarters of losses, driven by increasing sales volumes and higher margins, although upsides will be capped by the unexpected gas price hike in July.

Even so, we believe that the conditions will improve in 1H2020, following lower production costs i.e.: electricity costs, ASPs normalisation and resilient demand for rubber gloves.

According to MARGMA, the export revenue for the rubber gloves industry is expected to reach RM20.68 bln next year, from RM18.2 bln forecast in 2019, due to higher demand from Asia and Africa. Meanwhile, increased operational and raw materials prices could prompt a price increase in rubber gloves in 2020; supporting revenue growth.

Valuation and Recommendation

We maintain our BUY recommendation on CGB with an unchanged target price of RM0.95 by ascribing to an unchanged target PER of 17.0x to its FY20 EPS of 5.6 sen as we continue to believe in the group’s long-term growth prospects and healthy balance sheet.

Our positive call is also premised on its still attractive valuations as the group is currently trading at forward PER of 12.0x-13.0x, which is below its two-year mean of 16.5x. 

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, unexpected fluctuations in latex prices and forex movements.

Source: Mplus Research - 11 Dec 2019