A Full Analysis on Comfort Gloves Berhad

Comfort Gloves Berhad (CGB) (KLSE: COMFORT) is involved in the manufacturing and trading of natural and synthetic specialty examination gloves. The group has two plants located in Simpang and Matang, Taiping, consisting of 53 production lines. 

Since the start of the year, the group’s share price has risen at a tear, increasing over 300% in value. 

In this article, we will take a closer look at the business, management and financial aspects of the group, to assess whether it is worth an investment. 

Background of the group

Listed on the Main Board of Bursa Malaysia, CGB is formerly known as Integrated Rubber Corp Bhd (IRCB). IRCB slipped into PN17 status after the group defaulted on RM71.0 million worth of debt obligations in 2012. 

The company received fresh capital injection totalling RM44.8 million from Managing Director (MD) Mr. Cheang Phoy Ken and private investor Keen Setup Sdn Bhd (KSSB) in 2013. Together with its ongoing efforts to turnaround the group’s performance, IRCB exited PN17 status two years later after Bursa Malaysia approved its early uplift. The group also changed its name from IRCB to CGB in the same year, in order to improve the visibility and marketability of the group. 

Premium manufacturer of specialty gloves

CGB’s long term vision is to be the premium manufacturer of natural and synthetic specialty examination gloves. To stand out among its competitors, the group rationalised its product mix to be different from big volume players. 

CGB’s specialty gloves may come in different lengths, colours, thickness, and quantity per box, as the varieties are meant to cater to different customer group needs. To illustrate, the length of the gloves can extend from the conventional wrist length up to the elbow level. Demand for longer length gloves comes from users in the industrial, ambulance, lab and pharmaceutical sectors, as larger coverage area for the gloves is required to prevent contamination or infection when in contact with unwanted or hazardous materials. 

Likewise, extra-thick gloves are in demand for some industrial and medical usage with exposure to chemotherapy. These groups of users require thicker protection to withstand their heavy-duty usage purposes. CGB stands out in meeting these requirements with its flexibility in its manufacturing process, while big volume players place more focus on the economies of scale and producing non-specialty gloves. 

CGB is mainly an export-oriented company with the majority of its products exported. In 2020, 60% of its revenue came from key markets such as the US and Canada (21.0%), Asia (excluding Malaysia) (34%) and Europe and other markets at 1.0%.  

(Source: 2020 annual report)

The group’s growth strategies include expanding its manufacturing facilities in Malaysia, as well as diversifying its product range. In November 2019, Comfort Rubber Gloves Industries Sdn Bhd, a wholly-owned subsidiary of the group, entered into a sales and purchase agreement with the group’s MD for the purchase of 2 plots of land for a total cash consideration of RM1.9 million for expansion.

CGB has seen a sudden spike in demand since the Covid-19 outbreak. With the commissioning of new production lines, the group managed to increase productivity to keep up with a surge in orders. Besides, its higher productivity improves the group’s margin by increasing economies of scale. 

Experienced management team 

Mr. Cheang Phoy Ken joined CGB’s Board of Directors (BoD) as its MD in 2013. Prior to CGB, Mr. Cheang was the founder and Chief Executive Officer (CEO) of Disposable Medical Product, Inc., a medical glove marketing and distribution company from 1987 to 1994. He was also involved in the management of Pacewell Asia (from 1994 to 2007), a subsidiary of glove producer Seal Polymer Industries (delisted), which Mr. Cheang helped list on the Main Board of Bursa Malaysia. 

Mr. Cheang has a direct and indirect equity stake of 18.3% in the group. Mr. Cheang’s son, Mr. Sean Kar Seng Cheang also sits on the Board of CGB as an Executive Director. He owns an equity stake of 0.7% in the group.  

Dato’ Lau Eng Guang is the largest shareholder of CGB with an equity interest of 22.3%, by virtue of his interest in KSSB and Safari Bird Park & Wonderland Sdn Bhd. Dato’ Lau’s son (Mr. Lau Joo Yong) and nephew (Mr. Lau Joo Pern) both serve on the Board of CGB as Executive Directors. 

(Source: 2020 annual report)

Financials  

Measure 1: Growth in revenue and profits

The Group has seen spectacular compounded annual growth in revenue of 26.9% and profit after tax of 50.5% over the past 6 years. CGB believes prospects for the rubber glove manufacturing sector remain strong with increasing demand arising from switching trends towards nitrile glove. As overall demand for nitrile gloves increases, the market is seeing increase segmentation and differentiation leading to an increased demand for specialty gloves.  

Measure 2: Profitability

CGB’s gross profit margins, net profit margins and return on equity ratios have improved significantly from 2015 levels. Gross profit margins are relatively stable at 12.0% – 14.7% from 2016 to 2020, while net profit margins ranged from 5.9% – 10.0% over the same period. 

Separately, its return on equity ratios are respectable at 10.0% – 14.6%, demonstrating management is becoming more efficient in allocating and converting every dollar of investor capital into profit.

Measure 3: Liquidity

While CGB’s cash ratio is relatively low at 0.3x, the group should not have any liquidity issues as its gearing ratio is kept low at 0.2x. Further, it has a cash conversion cycle of approximately 91 days, that means it is able to convert its investment in inventory into cash flow from sales in roughly 3 months. 

Round 4: Dividends payout

CGB does not have a dividend policy and has only paid dividends twice in the past 6 years. Since the group is growing rapidly it is re-investing its profits back into the business. 

Conclusion

With a closing share price of RM4.10 as at 21st July 2020, CGB is trading at a price to earnings (PE) ratio of 57, with a market capitalisation of RM2.4 billion. 

With the recent coronavirus pandemic, CGB expects gloves consumption to increase in the long run due to rising global health awareness. With supply shortages in the global market, the group is capitalising on this opportunity to aggressively expand its customer base for future growth. 

CGB’s stock price has rocketed due to favourable market conditions. Therefore, investors looking at CGB now would have to consider whether the growth potential is sustainable and if such growth has been fully factored into its current share price. 

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