Maintain NEUTRAL, new TP of MYR0.87 (unchanged 14x FY19F P/E) from MYR0.76, -9% total expected return. Comfort Gloves’ 1HFY19 core earnings of MYR11.4m came below expectations. The underperformance was mainly due to one-off logistics expenses of MYR4.4m. We trim FY19F earnings by 4% on higher selling and marketing expenses but lift FY20- 21F by 14%, after updating USD/MYR and sales volume assumptions.

Dragged by one-off logistic expenses. Comfort Gloves’ 1HFY19 (Jan) core earnings of MYR11.4m were below expectations, at 38% of our full-year estimate. This was largely from one-off logistics expenses of MYR4.4m. Meanwhile, no dividends were declared, as expected. For FY19, we expect DPS of MYR0.03 (3% yield). In 2QFY19, it turned from 1QFY19’s net cash of MYR14.7m to a net gearing of 0.1x.

YTD-YoY, revenue improved 4% while core net margin dropped to 5.3% from 9.2%, mainly from the MYR4.4m one-off logistics expenses. Meanwhile, we believe higher raw nitrile prices may have partially contributed to lower margins.

Positive on the proposed acquisition of 100% equity interest in Pacewell. The group proposed to acquire 500,000 ordinary shares, representing 100% equity interest in Pacewell Asia SB (Pacewell) for MYR150,000 in cash. It is expected to be completed before 31 Oct. The principal activity of Pacewell is retailing gloves, but it ceased operating in 2017. As Pacewell has a 510(k) licence under the US Food and Drug Administration (FDA), this should enable Comfort Gloves to immediately export a medium-risk medical device to the US. In our view, we believe this could be a positive turn for the group, as this helps it to own additional FDA licenses, as well as saves time and cost in new license applications.

Trim FY19F earnings by 4% but lift FY20-21F by 14%. We cut FY19F margins to reflect the higher selling and marketing expenses. However, we nudge up our FY20-21F sales volume assumption and update our USD/MYR based on the latest in-house exchange rate assumption, as the company may likely draw in more orders from the proposed acquisition of Pacewell.

Maintain NEUTRAL with a higher TP of MYR0.87, as we roll forward our valuation to FY20F on an unchanged P/E of 14x, near its 3-year historical average. The ascribed P/E is lower than other rubber glove players’ 1-year forward average 29x P/E. We expect earnings to be supported by ongoing capacity expansion, sturdy financials and its niche in premium speciality gloves. Also, the uplift from the FDA Import Alert list could be a re-rating catalyst for the stock.

Source: RHB Securities Research - 1 Oct 2018