• Reiterate BUY and MYR1.08 TP, 45% expected total return, on FY21F P/E of 18x. Our valuation is lower than peers’ 25x 1-year forward average P/E. 9MFY20 (Jan)’s earnings were broadly in line, as we anticipate higher sales ahead. We remain positive on its earnings prospects, premised on ongoing capacity expansion and research & development effort to grow sales, and increasing demand for specialty gloves. As the bespoke gloves manufacturer, we believe the progressive capacity expansion is timely to fulfil rising demand.

• Broadly within expectations. Comfort Gloves’ 9MFY20 earnings of MYR22.9m were broadly in line, at 72% of our full-year estimates. Net profit expanded 24% YoY, as it recorded higher sales (+8% YoY) and lower effective tax of 19% (9MFY19: 26%). Also, the group incurred higher logistics expenses in the prior year, which contributed to the low base effect. QoQ, while revenue grew 14%, 3QFY20 earnings inched up 4%. We believe this could be contributed by higher raw materials costs, gas tariff hike, and higher effective tax rate of 21% (2QFY20: 15%).

• No dividends were declared, as expected. As at 3QFY20, net gearing moved up to 0.24x, from 0.21x, from an increase in borrowings. Assuming cash is largely ploughed back for business expansion purposes, we expect FY20F DPS of 2 sen (2.6% yield), just a tad higher than FY18’s 1.5 sen.

• Earnings remain unchanged. We expect better earnings performance ahead, as we anticipate potential higher sales volume to come from rising demand for nitrile gloves.

• Anticipate six new lines to come in by 1QFY21. Comfort Gloves has 49 production lines in the two plants in Simpang and Matang, Taiping that can produce up to 430m pieces of gloves/month. As at 3QFY20, it has allocated MYR32.7m 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 new lines are expected to come in by 1QFY21, which can collectively produce up to 490m pieces of gloves/month. Beyond current expansion, we believe more capacity may be added in the future, as it had acquired about 39 acres of land in Perak in 2018 that can potentially house more capacity ahead. As demand for nitrile and specialty gloves increase, the potential capacity expansion could help to capture more market share moving forward, in our view, given its niche in the premium specialty gloves segment.

• 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 - 17 Dec 2019