UG Healthcare - RHB Invest 2018-05-11: Optimistic Outlook With Output Rise Imminent

UG Healthcare - RHB Invest 2018-05-14: Optimistic Outlook With Output Rise Imminent UG HEALTHCARE CORPORATION LTD SGX: 41A

UG Healthcare - Optimistic Outlook With Output Rise Imminent

  • We met with management and came away optimistic about UG Healthcare’s prospects going forward. 
  • New production capacity for 500m gloves pa is on track to come onstream at the end of June or early July. There would also be further expansion of its distribution network in the South American market. Management expects the new production capacity to be fully taken up by Oct 2018.
  • Following the meeting, we have raised our FY18 net profit forecast by 6%. 
  • Maintain BUY and Target Price of SGD0.32, based on FY19F P/E of 14x, and offering 60% upside.

What's New

Management guided that 4QFY18 (Jun) would continue to benefit from the reconfiguration of its manufacturing facility,

  • ... which contributed to the 10% y-o-y and 17% y-o-y increases in its 3QFY18 revenue and net profit respectively. Utilisation has risen to 70-75% (from 60%), which supported the increase in revenue.

New production capacity coming onstream in mid-2018.

  • The initial production volumes are targeted for Brazil, Europe and China. Management expects the new 500m annual glove capacity (to 2.9bn units) to be fully taken up by Oct 2018. This would be via selling to its own downstream companies ie the UG branded gloves.

Management indicated that the gross profit margin of 20-30% is achievable,

  • ... depending on the investment in marketing resources. For FY19, we are conservatively assuming a gross margin of 17%, given the initial start-up of the new 500m annual glove capacity. There is therefore potential for earnings to be stronger than our expectations, if UG Healthcare’s execution surprises on the upside.
  • We have raised both our FY18 turnover and net profit forecasts by 6% to factor in the positives above.

BUY recommendation maintained.

  • UG Healthcare trades at FY19F P/E of 8.6x. This is sharply lower than the FY19F peer average of 25x. We believe its production growth strategy could bring its P/E closer to its peer average.
  • Our Target Price of SGD0.32 is based on FY19F P/E of 14x, and close to our DCF-derived fair value of SGD0.31. We ascribe a lower target P/E (vs its peers), given UG Healthcare’s smaller capacity.
  • Key risks include higher gas and raw material prices, which could narrow margins.

Leng Seng Choon CFA RHB Invest | 2018-05-11
SGX Stock Analyst Report BUY Maintain BUY 0.320 Same 0.320