Results Review

• Comfort Gloves Bhd‘s 3QFY20 net profit rose 4.9% Y.o.Y to RM7.4 mln, from RM7.1 mln a year ago, in-line with higher sales revenue, which grew 5.9% Y.o.Y to RM134.5 mln, from RM127.0 mln last year.

• Subsequently, cumulative 9MFY20 also jumped 23.9% Y.o.Y to RM22.9 mln compared to RM18.5 mln earlier, while revenue increased 8.4% Y.o.Y to RM372.1 mln, from RM343.3 mln in 9MFY19.

• The latest earnings were broadly in-line with our estimated net profit, although revenue outperformed our expectations and accounted for 81.2% of our previous estimated revenue of RM458.4 mln, mainly due to higher-than-expected ASPs.

• Moving forward, we revised our FY20-FY21 revenue upwards by 10.5% and 12.1% to RM506.4 mln and RM538.1 mln respectively, on the back of stronger ASPs, while net profit estimates remains unchanged after some minor housekeeping in our margins, depreciation and net interest assumptions.

Prospects

Meanwhile, we expect Thailand’s largest gloves maker Sri Trang Gloves (STG) to continue its expansion activities, on the heels of its IPO debut on the Stock Exchange of Thailand by 3Q2020. We believe the group will expand its production capacity by about 20% to 30.0 bln gloves next year, from 25.0 bln in 2019. Although, the new capacity influx from STG could weigh on pricing dynamics, we think that increased competition could be limited to the latex segment for now as majority of STG’s sales are contributed from latex gloves (about 67% of total sales). To recap, CGB derived close to 85% of its revenue from synthetic premium specialty gloves in FY18, thus we also see limited negative impact to CGB from the aforementioned issue. On the upside, we expect increased market share from the U.S. markets after Washington’s tariffs hit China-made medical rubber gloves from 1st September, 2019. Increased sales, however, could be slightly capped by stronger price competition in Europe on potential trade diversion. Moving forward, CGB’s earnings growth is expected to be driven by higher sales volumes, improved margins and cost efficiency.

Valuation and Recommendation

We maintain our BUY recommendation on CGB with an unchanged target price of RM0.95 by ascribing to a target PER of 17.0x to CGB’s FY20 EPS of 5.6 sen, as we continue to believe in its solid revenue growth and earnings recovery prospects, after overcoming the FDA issue last year. 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 - 17 Dec 2019