• BUY, MYR1.08 TP implies c.45% total return. We expect FY20F (Jan) earnings to strengthen YoY on higher sales, while higher logistics expenses were incurred in FY19. Overall, we remain upbeat on its earnings prospects, due to its ongoing capacity expansion, research and development efforts in growing sales, and rising demand for its specialty gloves. We think that its progressive capacity expansion is timely to fulfil growing demand, which could help lift sales volumes.

• Recap of 1HFY20. Comfort Gloves’ 1HFY20 earnings of MYR15.5m expanded by 36% YoY, mainly due to higher sales (+10%), higher logistics expenses incurred in the prior year and a lower effective tax rate of 18%. QoQ, earnings fell 15% due to the gas tariff hike and higher raw materials costs, in view of the weakening MYR/USD rate. Financially, net gearing declined from 0.25x to 0.21x, on its higher cash pile. While it has not declared a dividend for FY20, we only expect a slight increase in DPS of 2 sen (FY18: 1.5 sen), as we assume cash will be largely reserved for business expansion purposes.

• Expecting six new lines by end-2019. Comfort Gloves has 49 lines that produce up to 430m gloves a month. As at 2QFY20, it has allocated MYR28.5m in capex for the construction of a water treatment plant, solar system, a warehouse and a production plant consisting of six production lines. The six lines are expected to come in by end-2019, which overall can produce up to 490m pieces of gloves/month. Recall that it has proposed to acquire about 39 acres of land in Perak, which we believe could house more capacity ahead. As the demand for speciality gloves is increasing, we are sanguine on the potential higher capacity that could help it capture more market share.

• Potential beneficiary of the imposition of US tariffs. Effective 1 Sep, the US imposed a 15% tariff on medical gloves made from China. This is expected to lead to price competitiveness for Malaysian glove producers. This may benefit Comfort Gloves, in our view, as US and Canada is one of its key market (34% of FY19 sales) and it has a competitive advantage in producing premium specialty gloves.

• Reiterate BUY, with a TP of MYR1.08, with a c.45% expected total return, based on FY21F P/E of 18x. As a bespoke gloves manufacturer with a niche in the premium speciality gloves market, it remains dedicated to coming up with new products to help retain as well as attract more customers. Compared to its peers’ 1-year forward average P/E of 25x, our valuation is at a discount, as we factored in its relatively smaller market cap. Having said that, its FY20F earnings growth is above the peer average, and we believe that it is trading at an undemanding forward P/E of 14x, with a FY19-21F CAGR of 12%.

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

Source: RHB Securities Research - 9 Dec 2019