Can Comfort Gloves Bhd Continue To Grow?

Initially listed as Integrated Rubber Corporation Bhd, Comfort Gloves Bhd is one of the few key corporate turnaround successes in Malaysia. It was listed as a PN 17 entity in December 2012 as the company was debt-ladened due to strings of losses and poor cash flow management. 

The company was then rescued in 2014 by its current owners, Mr. Cheang Phoy Ken and Keen Setup Sdn Bhd, which is owned by the Lau family. Fast forward to 29 October 2019, Comfort Gloves had recorded profits in five consecutive years and is now worth RM 441.8 million in market capitalisation. 

In this article, I’ll highlight on its latest financial results and valuation figures. As such, here are 10 things to know about Comfort Gloves Bhd before you invest. 

• Growth Story
  In FY 2016, Comfort Gloves had raised RM 57.9 million from conversion of warrants, hence, giving the company much needed cash to remain in business. Its new owners had invested RM 24.5 million to add a total of 11 production lines to expand its production capacity by 30% to around 4.0 billion gloves per year in FY 2017. Subsequently, for the next 2 years to FY 2019, it has added another 9 production lines and thus, lifting the company’s production capacity to 5.1 billion to-date.

Financial Year	Production Lines	Production Capacity (Billion Gloves Per Annum)
2017	40	4.00
2018	43	4.36
2019	49	5.08

Source: Comfort Gloves Bhd’s Annual Reports

• Geographical Markets
  In addition to domestic sales, Comfort Gloves has successfully exported its products to North America, Europe and nations across Asia. Here, I’ll provide a breakdown of its geographical revenues for FY 2019:

Geographical Markets	Revenues FY 2015 (RM ‘000)	Revenue FY 2019 (RM ‘000)	Revenue FY 2019 (%)
Export Sales	137,890	321,141	67.7%
North America	44,922	162,823	34.3%
Europe	26,209	31,545	6.7%
Asia (Ex. Malaysia)	52,723	118,611	25.0%
Others	14,034	8,161	1.7%
Domestic Sales	17,327	152,892	32.3%
Total Revenues	155,217	474,033	100%

Source: Comfort Gloves Bhd’s Annual Reports

• Profitability
  Comfort Gloves had achieved a CAGR of 32.2% in revenues for the last 4 years, up from RM 155.2 million in 2015 to RM 474.0 million in 2019. Earnings have risen from RM 23.0 million in 2015 to RM 35.9 million in 2018 before recording a dip to RM 27.9 million in 2019, as a result of a one-off logistic cost of RM 5.4 million in that financial year. Since 2016, Comfort Gloves achieved a 4-Year Return on Equity (ROE) Average that amounts to 12.49% per annum. This means, Comfort Gloves has made on average RM 12.49 in earnings a year from every RM 100.00 it has in shareholders’ equity from 2016 to 2019.

Source: Comfort Gloves Bhd’s Annual Reports

• Cash Flow Management
  From 2015 to 2019, Comfort Gloves has generated a total of:
  
  – RM 67.6 million in positive cash flows from operations.
  – RM 71.9 million in equities.
  – RM 63.5 million in bill payables.
  – RM 2.1 million in interest income.
  
  
  Out of which, it spent RM 195.4 million in capital expenditures (CAPEX) which resulted in its expansion of its production capacity in the period, which also accounted for nearly all of its cash inflows for the period. As such, it paid out a drip of dividends in FY 2019 worth RM 5.6 million for profits made in FY 2018.
  
• Balance Sheet Strength
  As of 31 July 2019, Comfort Gloves Bhd has recorded:
  
  – RM 113.6 million in net debt.
  – RM 301.8 million in total equity.
  – RM 208.9 million in current assets.
  – RM 108.5 million in current liabilities.
  
  Thus, its gearing ratio and current ratio is 37.6% and 1.93 respectively.
  
• Latest 12-Month Results
  Over the last 12 months, Comfort Gloves generated RM 495.1 million in revenues and RM 32.0 million in shareholders’ earnings or a total of 5.7 sen in earnings per share (EPS). Based on RM 301.8 million in the firm’s total equity, Comfort Gloves’ Return on Equity is 10.60%.

Period	GroupRevenue(RM ‘000)	Shareholders’ Earnings (RM ‘000)	Earnings per Share (Malaysian Sen)
Q3 2018	126,950	7,068	1.26
Q4 2018	130,550	9,386	1.67
Q1 2019	119,956	8,411	1.50
Q2 2019	117,636	7,116	1.26
Total	495,092	31,981	5.69

Source: Comfort Gloves Bhd’s Quarterly Reports

• Concentration Risk of Major Customers.
  In FY 2019, Comfort Gloves has generated RM 52.8 million (or 11.1%) in revenues.
  
• Major Shareholders
  On 2 May 2019, Comfort Gloves Bhd’s 5 biggest shareholders are listed as follows:

No.	Major Shareholders	Direct Shareholdings (%)
1	Cheang Phoy Ken	18.09%
2	Keen Setup Sdn Bhd (KSSB)	12.19%
3	Dato’ Lau Eng Guang	7.14%
4	Lau Joo Yong	6.53%
5	Datin Goh Kim Kooi	3.95%

Notes:
Cheang Phoy Ken is the Managing Director of Comfort Gloves. Sean, his son is an Executive Director of the company.

Dato’ Lau Eng Guang is a substantial shareholder of Comfort Gloves via his direct shareholdings and stakes in KSSB. Datin Goh, his wife is also a substantial shareholder of the company with her own shareholdings of 3.95% in Comfort Gloves.

Their sons, Lau Joo Yong and Lau Joo Kien are substantial shareholders. Lau Joo Yong has his own 6.53% shareholdings in Comfort Gloves. He is appointed as an Executive Director of the company. Lau Joo Pern, their cousin, is also appointed as an Executive Director of the company.

• P/E Ratio
  As of 29 October 2019, Comfort Gloves is trading at RM 0.78 per share. Based on its latest 12-month EPS of 5.69 sen, it has a current P/E Ratio of 13.71, which is the lowest over the last 5 years.

• P/B Ratio
  As of 31 July 2019, Comfort Gloves has net assets of RM 0.52 per share. Thus, it has a current P/B Ratio of 1.50, also the lowest in 5 years.

• Dividend Yields
  In FY 2019, Comfort Gloves had paid out 1.5 sen in dividends per share (DPS). Hence, it offers a current dividend yield of 1.92% per annum if it is able to maintain its DPS of 1.5 sen per annum in subsequent years. 

VIA’s Verdict 

Since 2016, Comfort Gloves Bhd has turnaround its financial results successfully with strings of profits for the last 4-5 years. But, its stock price has not reflected upon its improvements in profits in the period. Thus, its stock price is trading at P/E and P/B Ratio which are below its 4-year average. 

However, if Comfort Gloves can continue to show growth in its financial result, we might be looking at a good undervalued stock at the moment. Looking at its capacity expansion in its production lines, the company does have a good growth plan in place.

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