UG Healthcare - Maybank Kim Eng 2016-01-26: Business Remains Solid

UG HEALTHCARE CORPORATION LTD 41A.SI

UG Healthcare (UGHC SP) - Business Remains Solid

UG Healthcare’s stock price has fallen 35% in the past 2 days on massive volume.
In response to that, we hosted a conference call with management, Mr Lee Jun Yih, Executive Director and our institutional clients.
Management assured that the company remains in good shape and addressed concerns on the operations.

On the production front, things are moving according to plan.
UG started its phase 2 expansion production in Oct 2015 and all the new lines are operational, at optimum utilisation rate of 80-85%. Capacity will reach 1.9b gloves in FY6/16, up from 1.5b in FY6/15.
Management also plans to share more details on its future plan, following its 1H16 results next week.
Further, there is no significant pressure on pricing and margins.
Raw material costs are stable and currency movements are positive for UG.
On fixed costs, management does not expect a significant increase in marketing and administrative costs, with only a small SGD0.2-0.3m increase for recurring listing expense.
UG was only listed in 1HCY15.

1H6/16 results will be released on 3 Feb, next Wednesday after market.
1H growth should be lower than the full year, at 5-10%, as there was no recurring listing expenses in 1H6/15 and the new capacity only contributed for 2 months.
2H6/16 should catch up with YoY growth of 80- 90%.
Inferring from the strong USD and low rubber and oil prices, there could be upside surprise to earnings. We have seen other glovemakers benefiting from these.
We expect 38% earnings growth YoY in the full year.

At SGD0.28, the stock is now lower than when we initiated in Oct 2015, trading at just 13x/10x FY15/16E P/E.
Its peers, which are all larger, have continued to rerate and are trading at 16-35x forward P/E.
Maintain BUY at TP of SGD0.41, based on 14x FY16 P/E, 40% discount to peer average for its smaller size; the discount has increased from 30% after the sector’s positive rerating.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-26

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.41 Same 0.41