• Stay BUY and MYR1.08 TP, 42% expected total return, after rolling forward our valuation base to FY21F on 18x P/E. That said, our valuation is lower than peers’ 26x 1-year forward average P/E. 1HFY20 (Jan)’s net profit was within expectations, but we trim FY20F-22F earnings after adjusting for higher raw material costs. We are positive on Comfort Gloves’ future earnings growth, premised on ongoing capacity expansion, emphasis on research & development to grow sales, and increasing demand for specialty gloves.

• Within expectations. Comfort Gloves’ 1HFY20 earnings of MYR15.5m were within expectations: 46% of our full-year estimate. Net profit expanded 36% YoY – mainly on higher logistics expenses incurred in 1HFY19, expansion in sales (+10%), and a lower effective tax rate of 18% (1HFY19: 24%). QoQ, however, earnings dipped 15% on a gas tariff hike and higher raw material costs, in view of a weakening MYR against the USD.

• Higher cash pile. Net gearing was reduced to 0.21x from 0.25x, as we see its cash and cash equivalents growing to MYR23.8m (1QFY20: MYR9.6m). That said, no dividends were declared as expected. For FY20F, we expect DPS of 2 sen (2.6% yield), which is a tad higher than FY18’s 1.5 sen, as we anticipate cash to be ploughed back for business expansion.

• Slight 4-6% trim in FY20F-21F earnings, after imputing higher raw material costs.

• Impending six new lines to come in by end 2019. Comfort Gloves has 49 production lines that can produce up to 430m pieces of gloves/month. By end 2019, it is expected to add another six lines, which can collectively produce up to 490m pieces of gloves/month.

Recall that in 2018 the group proposed the acquisition of c.39 acres of land in Perak. We believe more capacity may be added in future beyond its existing expansion plan. Given that demand for specialty gloves is on the rise, we think the expansion could potentially help the group capture more market share moving forward, given its niche in the premium specialty gloves segment.

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

Source: RHB Securities Research - 27 Sept 2019