Better earnings ahead expected for Comfort Gloves

TheEdge Wed, Dec 18, 2019 10:01am - 4 years View Original


Comfort Gloves Bhd
(Dec 17, 76 sen)
Maintain buy with an unchanged target price (TP) of RM1.08:
We reiterate “buy” and our TP of RM1.08, with a 45% expected total return on forecast financial year ending Jan 31, 2021 (FY21F) price-earnings ratio (PER) of 18 times. Our valuation is lower than peers’ 25 times one-year forward average PER. Comfort Gloves Bhd’s cumulative nine months of FY20 (9MFY20) earnings were broadly in line as we anticipate higher sales ahead. We remain positive on its earnings prospects, premised on ongoing capacity expansion, research and development (R&D) efforts to grow sales, and increasing demand for specialty gloves. As a bespoke glove manufacturer, we believe its progressive capacity expansion is timely to fulfil rising demand.

Comfort Gloves’ 9MFY20 earnings of RM22.9 million were broadly in line at 72% of our full-year estimate. Net profit expanded 24% year-on-year (y-o-y) as it recorded higher sales (+8% y-o-y) and a lower effective tax rate of 19% (9MFY19: 26%). Also, the group incurred higher logistics expenses in the prior year, which contributed to a low-base effect. Quarter-on-quarter, while revenue grew 14%, third quarter of FY20 (3QFY20) earnings inched up 4%. We believe this could have been contributed by higher raw material costs, gas tariff hikes and a higher effective tax rate of 21% (2QFY20: 15%).

As at 3QFY20, net gearing had moved up to 0.24 times, from 0.21 times, due to an increase in borrowings. Assuming that cash is largely ploughed back for business expansion purposes, we expect FY20 dividends per share of two sen (a 2.6% yield), just a tad higher than FY18’s 1.5 sen.

We expect a better earnings performance ahead as we anticipate potential higher sales volume to come from rising demand for nitrile gloves.

Comfort Gloves has 49 production lines in the two plants in Simpang and Matang, Taiping, Perak that can produce up to 430 million pieces of gloves per month. As at 3QFY20, it had allocated RM32.7 million in capital expenditure for the construction of a water treatment plant, a 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 490 million pieces of gloves per month. Beyond the current expansion, we believe more capacity may be added in future as the company acquired about 39 acres (15.78ha) of land in Perak in 2018 that can potentially house more capacity ahead. As demand for nitrile and specialty gloves increases, the potential capacity expansion could help capture more market share moving forward, in our view, given its niche in the premium specialty glove segment.

Risks to our call include higher-than-expected increases in raw material prices, and heightened competition among rubber glove players. — RHB Research Institute, Dec 17

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