• Downgrade to NEUTRAL from BUY, higher MYR3.18 TP from MYR1.08, 3% upside with c.1% yield. Our TP is based on CY21F P/E of 25x – 25% discount against peers’ average. This reflects higher risk for earnings. Comfort Glove’s products were detained by the US Food and Drug Administration (FDA). We expect some delivery delays for the company, but not order cancellations. Downgrade to NEUTRAL as near-term sentiment may be affected by the FDA import alert news. However, share price downside is limited due to strong earnings prospects.
   
• FDA import alert. On 26 May, several types of Comfort Glove’s (Comfort) examination gloves were placed under Level 2 detention. We understand that this is categorised under the FDA’s Import Alert 80-04, “Surveillance and Detention Without Physical Examination of Surgeon's and Patient Examination Gloves”. This is the second detention for the company.

• What is Level 2 detention? According to the FDA, “If a manufacturer/shipper, while on Level 1 detention, has a violative sample analysed by a private laboratory, the district should notify Division of Import Operations & Policy (DIOP) and submit supporting documentation…”. The FDA website further explains that “DIOP will bring this action to the attention of Center for Devices and Radiological Health (CDRH)”. Refer to page 3 for more details.

• Expect some delays of delivery but not cancellation of orders. We gather that the company has reacted swiftly and submitted the necessary documentation to the FDA. Its US agents have been working with the agency to quickly rectify the situation. In our view, the detention will delay some of Comfort’s products delivery by up to one month. However, it is unlikely to affect sales due to strong near-term demand for gloves globally.

• We believe Comfort’s ASP has increased as demand-supply dynamics have tightened up. We expect near-term demand growth of 50% to exceed supply growth of a maximum 10%. On the demand side, the worse-thanexpected COVID-19 spread globally has led to higher demand for gloves. On the supply side, the Movement Control Order (MCO) has slowed construction of a new manufacturing plant. Under such market conditions, an ASP rise is inevitable, and it will be across the board for all glove companies (including Comfort). Refer to page 4 for our sector demandsupply analysis.

• Downgrade to NEUTRAL with TP of MYR3.18. FY20-22F earnings are increased by 24%-90% after factoring in higher ASP. Accordingly, our TP is increased to MYR3.18 from MYR1.08. However, we downgrade the stock to NEUTRAL as near-term sentiment may be affected due to the news of the FDA import alert.

Source: RHB Securities Research - 28 May 2020