• Reiterate BUY with lower MYR1.08 TP, from MYR1.21, 33% upside with 2.5% yield, based on 18x FY20F P/E, at +1SD of 3-year historical average. Comfort’s FY19 (Jan) earnings were slightly below expectations, which we think was due to higher-than-expected selling and marketing expenses. We believe future earnings will be supported by an improvement in sales, ongoing capacity expansion and its niche in premium speciality gloves. Our valuation is still lower than other glove players’ 1-year forward average P/E of 22x.

• Slight miss in expectations. Comfort Gloves’ FY19 earnings of MYR27.9m made up 94% of our full-year estimate. We believe the negative variance could be due to higher-than-expected selling and marketing expenses. Looking at the numbers, FY19 revenue grew 12.5% YoY, mainly due to higher sales. However, net profit fell 29% YoY, partially due to one-off logistics cost of MYR5.4m. Also, the increase in taxation expense and provision of deferred taxation expense were a drag on the bottomline, as compared to the tax allowance that the group enjoyed in the previous year. Meanwhile, 4QFY19’s earnings improved 33% QoQ, mainly attributable to reversal of taxation that was overprovided in the previous period. As such, effective tax rate made up only 9.5% in this quarter.

• Final DPS of MYR0.015 was recommended. This was slightly lower than our initial expectation of MYR0.02. That said, the DPS of MYR0.015, or 2.5% yield, was higher than FY18’s MYR0.01. Net gearing ratio, however, expanded further to 0.24x, from 0.13x in 3QFY19, which we believe was due to higher bill payables.

• Trimming FY20F-21F earnings by 7-11% and introducing FY22F earnings at MYR40m. We cut FY20F-21F margins to reflect the higher selling and marketing expenses. However, we adjust our FY20F-21F sales volume assumption after factoring in the new capacity.

• Capacity expanded to 49 lines – up and running. The new six production lines have been running since Jan 2019, with capacity now a total of 49 production lines. The lines overall have capacity to produce up to approximately 400m pieces of gloves per month. We believe the capacity growth could be timely to support potential increase in demand. Meanwhile, raw nitrile prices have begun to retrace in recent months. All in, we think these may contribute to better earnings ahead.

• Risks to our call are higher-than-expected increases in raw material prices, and heightened competition among rubber glove players.

Source: RHB Securities Research - 27 Mar 2019