UG Healthcare - Maybank Kim Eng 2016-02-05: Boost from strong pricing power

UG HEALTHCARE CORPORATION LTD 41A.SI

UG Healthcare (UGHC SP) - Boost from strong pricing power

The greatest positive surprise in 1H6/16 earnings came from the gross margin, due to cheaper raw material costs.
Gross margin of 23.9% is a record high, and we were only expecting 21%.
In 2016, management continues to see sustained weakness in the latex price.

For next year, UG targets to add another 400-500m gloves per annum, or 21-26% capacity expansion from 1.9b this year. They should commence full operations by Oct 2016.
Beyond that, UG has an adjoining plot of land that can support another 800-1,000m gloves per annum.

17% increase in gas price in Jan 2016 from removal of government subsidies and doubling of foreign worker levy from MYR1,250 to MYR2,500 are the chief concerns raised.
Offsetting these will be low material prices and increased efficiency from new machineries.
Our sensitivity analysis indicates that every 10% increase in energy costs will reduce earnings by 1% and vice versa.
For the foreign workers levy hike, we expect earnings of UG to fall by 1.5%, assuming its 400 foreign workers bear 50% of the hike. Currently, employees bear the entire foreign worker levy.
For raw material price, we estimate 2% earnings sensitivity for every 1% change in its raw material prices.

We raise our TP to SGD0.52 from SGD0.41, after rolling over our base year to FY6/17E, still based P/E target of 14x. That is 40% discount to our peer average target for its smaller size.
UG is trading at 50% discount vs peers, despite having a comparable growth profile and unique business model.
We cut our FY17-18E EPS by 11-12% after reducing the capacity expansion by 200m for FY17, to be more conservative.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-02-05

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.52 Up 0.41