Reiterate NEUTRAL with a higher TP of MYR0.76, from MYR0.68, -8% total expected return, based on an unchanged 14x FY19F P/E. Comfort Gloves’ 1QFY19 core earnings of MYR7.3m met expectations, at 27% of full year estimates. The group finalised three new production lines, which contribute to 360m additional pieces of specialty gloves per year. As such, we nudge up our FY19-21F earnings by 3-11%, as we fine-tune our production capacity and sales volume assumptions. We estimate earnings will be supported by its sales to other regions, capacity expansion and solid financials.
Soft start for the year. Comfort Gloves’ 1QFY19 (Jan) core earnings of MYR7.3m were in line. Revenue was flattish QoQ, while core net margin softened to 6.9% (from 7.7% in 4QFY18), mainly due to higher raw nitrile and gas prices, and stronger MYR/USD. As expected, no dividends were declared. We expect FY19F DPS of MYR0.01, implying a 1% yield. The net cash amount was reduced slightly to MYR14.7m, from MYR18m in 4QFY18.
Expecting more capacity to come on stream. Comfort Gloves finalised the additional three new highly flexible and customisable production lines, which contribute an additional production of 360m pieces pa. This brings the total to 43 production lines, and annual manufacturing capacity to approximately 4.36bn pieces pa. We expect the upcoming eight new lines would be operational in FY19. The company recently announced the acquisition of a piece of vacant land worth MYR13.2m at Bemban, Perak, in line with its ongoing expansion plan.
Business is ongoing so far. While the group has yet to be removed from the FDA Import Alert 80-04 list, sales to the US continue, albeit having to go through inspection upon arrival in the US. Comfort Gloves is working towards removal from the Import Alert list. In FY18, sales to the US and Canada were 36% (vs 42% in FY17) whereas domestic sales increased to 28% (from 11% in FY17). In view of this, we think potentially slower sales recognition from the US could be partially mitigated by a pick-up in domestic sales.
FY19F-21F earnings nudged up 3-11%, as we raise our production capacity and sales volume assumptions in order to factor in the additional capacities from the three new production lines.
Maintain NEUTRAL with a higher TP of MYR0.76, on unchanged FY19F P/E of 14x, which is near -0.5SD of its 3-year historical average. This P/E multiple is lower than the 1-year forward average 29x P/E of the other rubber glove players. We believe Comfort Gloves’ earnings will be supported by sales to other regions, ongoing capacity expansion, solid financials, and its niche in premium speciality gloves. Meanwhile, the uplift from the FDA Import Alert list could be a re-rating catalyst for the stock.
Source: RHB Securities Research - 28 Jun 2018