KUALA LUMPUR (May 28): RHB Investment Bank Bhd expects Comfort Gloves Bhd’s near-term sentiment to be affected after several types of the company’s examination gloves were placed under the US Food and Drug Administration (FDA) Import Alert Level 2 detention.
RHB analyst Alan Lim has accordingly downgraded Comfort Gloves to “neutral” from a “buy” recommendation previously, but with a higher target price of RM3.18, from RM1.08.
In a research note today, Lim noted this is the second FDA import alert issued on Comfort Gloves, adding that in March 2018, several types of the firm’s examination gloves were placed under Level 1 detention.
He quoted the FDA as saying: “If a manufacturer/shipper, while on Level 1 detention, has a violative sample analysed by a private laboratory, the district should notify [FDA’s] Division of Import Operations & Policy (DIOP) and submit supporting documentation. DIOP will place the firm on Level 2 detention.”
Lim, however, expects only some delivery delays for the company, but not order cancellations.
“We gather that the company has reacted swiftly and submitted the necessary documentation to the FDA. Its US agents have been working with the agency to quickly rectify the situation.
“In our view, the detention will delay some of Comfort Gloves’ products delivery by up to one month. However, it is unlikely to affect sales due to strong near-term demand for gloves globally,” Lim wrote.
Additionally, he believes that Comfort Gloves’ average selling price (ASP) has increased as demand-supply dynamics have tightened up. “We expect near-term demand growth of 50% to exceed supply growth of a maximum 10%,” he added.
On the demand side, the worse-than-expected Covid-19 spread globally has led to higher demand for gloves, while on the supply side, the movement control order has slowed construction of a new manufacturing plant, said Lim.
“Under such market conditions, an ASP rise is inevitable, and it will be across the board for all glove companies, including Comfort Gloves,” said Lim.
Thus, after factoring in higher ASP, Lim expects Comfort Gloves’ FY20 to FY22 earnings to have increased by 24% to 90%, adding that the share price downside is limited due to strong earnings prospects.
Lim has projected the company’s net profit for the financial year ended Jan 31, 2021 (FY21) to be at RM44 million, and RM76 million in FY22. Revenue is projected at RM566 million in FY21 and RM677 million in FY22.
Shares of Comfort Gloves closed 37 sen or 12.01% higher at RM3.45 today, valuing the company at RM2.01 billion. Year-to-date, the counter has jumped by 337% from 79 sen.