• Maintain BUY and MYR1.08 TP, 80% expected total return, on FY21F P/E of 18x – lower than peers’ 27x 1-year forward average P/E. FY20 (Jan) earnings were within expectations. The COVID-19 pandemic has led to a global surge in demand for gloves. We think Comfort Gloves is on the right track to catch the wave given its timely commencement of new lines, ongoing research and development and capacity expansion to fulfil rising demand. We expect a busy year ahead for the gloves manufacturer.

• A good close to the year. Comfort Gloves’ FY20 earnings of MYR33.2m were within expectations, at 104% of our full-year estimates. Net profit jumped 19% YoY, on the back of higher revenue (+8% YoY) and better productivity. QoQ, net profit margin chalked up to 7.4%, from 5.5% in 3QFY20, mainly due to disciplined cost rationalisation and better product mix. We believe this could also have been contributed by lower raw materials costs.

• Lower net gearing position. As at 4QFY20, net gearing reduced from 0.24x to 0.16x, given pared down borrowings and higher cash piles. Assuming the majority of the cash is to be ploughed back to support business expansion, we expect FY21F DPS of 2 sen (3% yield), slightly higher than FY19’s 1.5 sen.

• No change to FY21F earnings. Meanwhile, we introduce FY23F earnings at MYR46m.

• Six new lines commenced in 1QFY21. The six new lines commenced operation in Feb 2020. This, alongside the existing 49 production lines in the two plants in Simpang and Matang, Taiping, are running at close to full capacity, which collectively can produce between 430-450m pieces of gloves/month. In our view, the commencement of the new lines was timely as it helps to cater for both existing demand as well as the global surge in demand – arising from the unexpected outbreak of the COVID-19 pandemic. Beyond current expansion, we believe more capacity may be added in the future, as the company 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 - 24 Mar 2020