Reiterate BUY with unchanged TP of MYR1.21, 39% total expected return, based on 18x FY20F P/E. Comfort Gloves’ 9MFY19 core earnings of MYR18.5m were broadly in-line, as we anticipate an improvement in earnings from higher export sales to the US, post removal from the FDA Import Alert list and lower raw nitrile costs. As such, we maintain our earnings forecast for now.
Broadly in-line. Comfort Gloves’ 9MFY19 (Jan) core earnings of MYR18.5m 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 Nov 2018. YTD, revenue grew 9% YoY on the back of higher sales and a strengthening of the USD against MYR. 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 MYR5.4m. The increase in taxation expense has also dragged down the bottomline, 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 QoQ numbers, revenue improved 16% due to an increase in sales and a stronger USD/MYR. As the bulk of one-off logistics expenses (MYR4.4m) was incurred in the previous quarter, its core net margin was higher at 5.6% vs 3.7% in 2QFY19.
No dividends were declared, as expected. For FY19 we expect DPS of MYR0.02, or a 2% yield. As at 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 MYR.
Potential improvement in earnings ahead. 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.
Maintain BUY with an unchanged TP of MYR1.21, based on 18x FY20F P/E, at +1SD of its 3-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’ 1-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.
Source: RHB Securities Research - 19 Dec 2018
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