UG Healthcare - Maybank Kim Eng 2016-08-25: New capacity cushioned weaker ASP; D/G to HOLD

UG Healthcare (UGHC SP) - Maybank Kim Eng 2016-08-25: New capacity cushioned weaker ASP; D/G to HOLD UG HEALTHCARE CORPORATION LTD 41A.SI

UG Healthcare (UGHC SP) - New capacity cushioned weaker ASP; D/G to HOLD

Results in line; Higher volume offset weaker ASP 

  • FY16 was in line with our expectation; core earnings grew 37% YoY due to increase in production volume. However, 2H16 core earnings fell 31% HoH due to lower ASP and gross margin from more competition. 
  • Management said ASP and gross margin have bottomed and performance should improve, driven by capacity expansion. Expansion will lift FY17 capacity by 26%. 
  • We cut FY17-18F EPS by 17-21% after reducing our ASP. 
  • Our TP is reduced to SGD0.37 from SGD0.52. Downgrade to HOLD for lacklustre growth.

Higher volume & associate contributions

  • The bulk of the earnings growth was driven by around 20% increase in production volume and 35% increase in associate contributions. 
  • To recap, UG increased its production capacity by 27% in FY16. However, revenue grew only 6% YoY as ASP fell c.10%.

Capacity expansion on track & healthy orders 

  • New capacity of 500m gloves per annum should commence production progressively by Nov 2016 and this will lift UG’s capacity by another 26% in FY17. Also, management is confident to fill up orders for its new capacity, leveraging on its robust internal distribution channel. 
  • UG is developing an existing plot of land beside the current manufacturing facility. This could increase production capacity by another 1b gloves or 42%, from 2.4b in FY17.

Expect slower growth; downgrade to HOLD 

  • To reflect a more competitive and less favourable environment, we cut FY17-18F EPS by 17-21% after reducing ASP assumption. As a result, our TP is reduced to SGD0.37, pegged to 12x FY17F EPS, based on 30% discount to peers’ target under our coverage. This is to incorporate UG’s smaller size and shorter track record. 
  • We expect FY17F EPS to grow by only 5%.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-25
Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 0.37 Down 0.520