We believe the sluggish 1HFY19 results (mainly driven by the one-off logistics expense related to restrictions slapped by the US FDA) and FDA Import Alert list have been largely priced in as valuations are undemanding at 14.1x FY20E P/E (50% below peers), supported by positive 11% FY19-21 EPS CAGR and potential further boost in US sales following the Pacewell’s acquisition as it possesses a 510(k) FDA license.

Niche player in the natural and synthetic specialty examination gloves segment.

The gloves come in different lengths, colours, thickness, and number of pieces per box, depending on customer needs, which cushions the company from tighter competition among big-volume glove players, as it offers flexibility in the customisation of orders and command a competitive edge and potentially higher margins.

To-date, Comfort has a wide range of product offering including surgical, clean-room and household gloves, with over 300 types of product offered. The group has two manufacturing facilities located in Matang and Simpang, Perak, consisting of 43 production lines and is expected to ramp-up its capacity to ~48 lines by FY19, churning close to 5.0bn pieces of gloves annually upon full commissioning. Meanwhile, future plans include establishing manufacturing facilities in Indonesia, Thailand and Vietnam.

Boosting US exports. The proposed acquisition of 100% equity interest in Pacewell (to be completed by end Oct) is positive for Comfort as Pacewell has a 510(k) licence under the US Food and Drug Administration (FDA), this should enable Comfort to immediately export a medium-risk medical device to the US. Currently, Comfort’s gloves are exported to the Northern American, Oceanic Countries, Middle East Countries, Europe, South America, Africa and Asia-Pacific region. Comfort exports about 72% of its products, with the US and Canada accounting for 36% of FY18 revenue, followed by the Asian region excluding Malaysia (26%), and Europe & others (10%).

Better quarters ahead. Comfort should see better results ahead following the disappointing 2QFY19 due to the one-off high logistics expense recurred as the company moves to resolve its exports to the U.S. As it is, utilisation remains at high levels of around 85.0%-90.0% across its production floor, indicating resilient demand for its rubber gloves. In the meantime, the group is still awaiting approval from the U.S. FDA in relation to its removal from the FDA red list.

Grossly oversold and poised for a technical rebound. Comfort’s share prices slid 25% from 3M high of RM1.10 (4 Sep) to a low of RM0.83 (11 Oct) before ending at RM0.855 yesterday. After a brief sideways trading, we expect the stock to stage a recovery as technical indicators are bottoming up. A successful breakout above RM0.895 will spur prices towards RM0.96 (200d SMA) before reaching our LT objective at RM1.00. Key supports are RM0.80-0.83. Cut loss at RM0.79.

Source: Hong Leong Investment Bank Research - 17 Oct 2018