UG Healthcare (UGHC SP) - Maybank Kim Eng 2017-02-10: Missed on input costs and lacklustre outlook; D/G to SELL

UG HEALTHCARE CORPORATION LTD 41A.SI

UG Healthcare (UGHC SP) - Missed on input costs and lacklustre outlook; D/G to SELL

1H17 earnings missed our expectation, at 24% of our FY17E. Earnings fell 57% YoY due to spike in raw material prices and increase in gas tariff.
Gross margin declined 9.5ppt YoY to 14%.
We cut our FY17-19E EPS by 33- 48%.
The industry players are adjusting their ASP gradually to pass on the cost inflation, but there will be a time lag. The industry outlook is challenging as significant supply will come on stream in 2H17.

Downgrade to SELL and reduce TP 32% to SGD0.25 from SGD0.37. Our TP is based on an unchanged 12x P/E (c.30% discount to peers target due to smaller size and shorter listing track record) rolled forward to FY18E.

USD/MYR appreciation was much lower than the spike in raw material prices. For the second half of 2016, USD/MYR increased by only 1% vs 22% surge in latex price and 54% rise in nitrile price. The spike was due to tighter supply caused by the severe flooding in southern Thailand.
Also, the wintering period of rubber trees could commence in Feb – May. The price increase continued to accelerate in Jan 2017; nitrile price rose 299% YoY/46% QoQ and latex price surged 108% YoY/28% QoQ.

Significant supply is expected to come on stream as all the major glove-makers are expanding their capacity. Total planned capacity of 18b gloves is equivalent to 19% of the global supply. This is much higher than the 6% increase in global demand of c.200b gloves. This could deter the passing on of cost-inflation and further compress gross margin.

The weakness in the glove industry should impact other glove makers as well, but larger players with higher margins, bigger earnings base and stronger bargaining power might be impacted less compared to smaller player like UG Healthcare. For instance, Top Glove (TOPG MK; HOLD; TP MYR5.30) reported a 43% YoY decline in 1QFY8/17 earnings.
We expect its FY8/17E EPS to decline 11% YoY.
In addition, Riverstone (RSTON SP; HOLD; TP SGD0.92) might also disappoint in its upcoming 4Q16 results due to the industry challenges.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-10

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