UG Healthcare - RHB Invest 2018-11-13: Gross Margin Widened From Production Efficiency

UG HEALTHCARE CORPORATION LTD (SGX:41A)

UG Healthcare - Gross Margin Widened From Production Efficiency

Maintain BUY with SGD0.32 Target Price, 49% upside plus 2% FY19F yield, pegged to 12x FY19F EPS.
We remain bullish on UG Healthcare after its results release, which saw net profit rising 21% y-o-y, and GPM widening 5.5ppts to 21.8%.
With Phase 1 of the new production facility adding 500m gloves pa capacity, UG Healthcare now has total capacity of 2.9bn gloves pa. Full commercialisation of Phase 1 by Dec 2018 should add further to earnings.

UG Healthcare's 1QFY19 (Jun) net profit of SGD1.04m was up 21% y-o-y – this represented 21% of our FY19F. We expect stronger earnings in subsequent quarters from higher production, and hence results are in line.
1QFY19 revenue rose 11% y-o-y, mainly due to an increase in the volume of gloves produced and sold. This came from commencement of new production lines and higher sales through expansion of distribution networks.
Gross profit margin widened to 21.8% (from 1QFY18’s 16.3%) due to better production efficiency from the increase in manufacturing capacity. 1QFY19 gross profit rose 49% y-o-y. We have conservatively assumed FY19 gross profit margin of 18.5%, rising to 19.3% for FY20.
The new production facility saw a progressive rollout of Phase 1 (500m gloves pa capacity for Phase1), and this brought total production capacity to 2.9bn gloves pa. Current overall average utilisation is 70%. Full commercialisation of Phase1, taking into account production, distribution, marketing and sales, is expected by Dec 2018.
Management is considering a further increase in capacity by another 300m gloves pa at the new production facility. This could potentially raise overall capacity to 3.2bn gloves pa.

Maintain BUY with SGD8.88 Target Price, which is pegged to 88x FY88F EPS, a discount to the peer average of 88x – this factors in UG’s much smaller production output vs its peers, most of which are listed on Bursa Malaysia.
Key risks include higher gas and raw material prices, which could narrow margins.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-11-13

SGX Stock Analyst Report BUY MAINTAIN BUY 0.320 SAME 0.320