Comfort Gloves to gain from demand in developing countries

By NUR HANANI AZMAN / Pic BLOOMBERG

COMFORT Gloves Bhd stands to benefit from higher demand for rubber gloves in developing countries as glove usage per capita still lags behind developed countries by about 20 times.

RHB Investment Bank Bhd (RHB Research) analyst Alan Lim noted that Comfort Gloves will likely benefit from sustained demand for its gloves with demand forecast to grow by 8%-10% post-pandemic.

Comfort Gloves’ reach per capita of about 10 pieces per annum (ppa) in developing countries still trails behind developed countries which is at about 200 ppa.

The research house maintained its ‘Buy’ call on the stock with a discounted cashflow (DCF)-derived target price (TP) of RM6.80, which accounts for a 27% upside and 4% yield.

“Our TP is reduced as we shift to the DCF valuation method and expect lower long-term nitrile glove average selling price (ASP) of US$40 (RM164.80) per 1,000 pieces.

“Following the 70% share price decline from its peak, Comfort Gloves is a value play, with a low financial year 2024 (FY24) price-to- earnings ratio of eight times (versus an average of 16.6 times) and strong balance sheet with RM71 million net cash,” Lim said in a note yesterday.

He added that the stock is currently undervalued at RM2.29 after its share price declined 70% from its peak in August last year.

Key risks for the counter include worse than expected long-term glove ASPs post-pandemic, lower than expected sales volume and higher than estimated raw material prices.

RHB Research reduced Comfort Gloves’ FY24 earnings estimate by 47% as nitrile glove ASP has been lowered to US$40 per 1,000 pieces.

“Hence, blended glove ASP for Comfort Gloves has been reduced to US$38. We assume the long- term volume mix to be 85% for nitrile and 15% for non-nitrile gloves,” it said.

The research firm expects US$40 to be a long-term bottom ASP for nitrile gloves on plans by the US to build its own glove manufacturing plants.

“We expect US’ cost of production to set the bottom for global nitrile glove prices in the future. When ASP drop below US$40, US producers will stop producing and, in the long term, ASP should revert back to this level,” it said.

Comfort Gloves’ share price rose 20 sen or 9.57% yesterday to RM2.29 at close, giving it a market capitalisation of RM1.33 billion.

On Monday, Comfort Gloves reported a 1,246% surge in net profit for its fourth quarter ended Jan 31, 2021 (4Q21), to a record RM137.87 million from RM10.24 million a year earlier due to higher sales volume with a significantly higher ASP.

Its revenue rose 130% year-on-year to RM318.9 million from RM138.65 million in the previous corresponding quarter attributed to better economy of scale that improved the margin from 7% to 43%.

Earnings per share for 4Q21 shot up to 23.65 sen from 1.78 sen.

The group declared a second interim dividend of 1.5 sen a share and special payout of 3.5 sen a share.

Comfort Gloves, in its bourse filing, said the flexibility of the group’s manufacturing process and customer base outside the medical market have allowed them to effectively manage the shortage of synthetic latex in the market.

It said premium specialty gloves manufactured by the group from natural latex are equally in demand by its partners worldwide as its synthetic latex counterpart.

“To meet this increased demand, the group will commission new production lines which would increase production capacity by 33% towards FY22.

“The current market environment has allowed the group to work with our partners worldwide to lock in commitments for the purchase of gloves,” the company said.