• Reiterate BUY and MYR1.08 TP, 33% upside plus 3% yield, based on 18x FY20F P/E or +1SD from its 3-year mean. 1QFY20’s earnings met expectations. We anticipate progressive growth in earnings, supported by ongoing capacity expansion, continuing emphasis on research and development to expand market offerings, and increasing demand for specialty gloves. This should bode well for Comfort Gloves given its niche in premium specialty gloves. Our valuation is lower than peers’ 1-year forward average P/E of 26x.

• In line. Comfort Gloves’ 1QFY20 (Jan) earnings of MYR8.4m met expectations, at 25% of our full-year estimate. Earnings grew 14.5% YoY, mainly due to higher sales (+13% YoY), while net margin was maintained at 7%. QoQ, PBT nudged up 2% despite sales falling 8%, as the group recorded higher profit from the sale of specialty gloves, which typically fetch better margins. That said, 1QFY20’s earnings fell 10% QoQ on higher effective tax rate.

• No dividends, as expected. For FY20F, we expect DPS of MYR0.02 (2.5% yield) – slightly higher than FY18’s MYR0.015, as we anticipate cash to be conserved for business expansion. Net gearing stood at 0.25x, a tad higher than 4QFY19’s 0.24x.

• Still expanding – another six new lines coming up. The group has a total of 49 production lines that can produce up to 430m pieces of gloves/month. By end 2019, it is expected to add another six new lines, which can collectively produce up to 490m pieces of gloves/month. Recall that in 2018, the group proposed to acquire c.39 acres of land in Perak. We believe more capacity may be added in the future beyond its existing expansion plan.

• FY21F-22F earnings adjusted higher by 3-5% on higher capacity assumptions. This is after factoring in the full commissioning of six new production lines that have been running since January. We also impute another six new lines into our assumption, which we anticipate would contribute from FY21F onwards.

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

Source: RHB Securities Research - 25 Jun 2019