Comfort Gloves Bhd
(Dec 19, 85.5 sen)
Maintain buy with an unchanged target price (TP) of RM1.21: Comfort Gloves Bhd’ cumulative nine months of financial year 2019 (9MFY19) core earnings of RM18.5 million came in at 62% of full-year estimates.

We deem this as broadly within expectations, as we anticipate higher export sales to the US post removal from the US Food and Drug Administration’s (FDA) Import Alert list at the end of November 2018.

Year to date, revenue grew 9% year-on-year on the back of higher sales and a strengthening of the US dollar against the ringgit.

Still, its core net profit margin was weaker at 5.4%, as compared to 9.9% in the preceding year, mainly due to one-off logistic expenses of RM5.4 million.

The increase in taxation expense has also dragged down the bottom line, as the company used to enjoy a tax allowance during the previous year.

We believe higher raw nitrile prices may have also partially contributed to lower margins.

Looking at its quarter-on-quarter numbers, revenue improved 16% due to an increase in sales and a stronger US dollar to the ringgit.

As the bulk of one-off logistics expenses (RM4.4 million) was incurred in the previous quarter, its core net margin was higher at 5.6% vs 3.7% in second quarter of financial year 2019 (2QFY19).

For financial year 2019, we expect dividend per share of two sen, or a 2% yield.

As at third quarter of financial year 2019 (3QFY19), its net debt slightly grew to 0.13x, from 0.10x in 2QFY19, which we believe was driven by an increase in bill payables, denominated in ringgit.

Assuming the demand for nitrile gloves remains intact, we expect exports to the US to recover post removal from the US FDA Import Alert list.

Capacity-wise, for now, the group is looking to add six production lines to its existing 43, which may be timely in order to cater to a potential increase in demand, in our view.

Meanwhile, raw nitrile prices have begun to retrace during the recent months.

All in, we think these factors may contribute to better earnings ahead.

We maintain our “buy” call with an unchanged TP of RM1.21, based on 18x financial year 2020 forecast price-to-earning, at +1 standard deviation of its three-year historical average.

We believe future earnings will be supported by an improvement in sales, an ongoing capacity expansion and its niche in premium speciality gloves.

Our ascribed valuation is still lower than that of the other rubber glove players’ one-year forward average P/E of 28x.

Risks to our call include a higher-than-expected increase in raw material prices, and stronger-than-expected competition among rubber glove players. — RHB Research Institute, Dec 19