UG HEALTHCARE CORPORATION LTD (SGX:41A)
UG Healthcare - Riding On Glove Demand Surge; Maintain BUY
- At a recent meeting, management said that demand for healthcare gloves has surged following the COVID-19 outbreak.
- Whilst 1HFY20 earnings were unexciting, earnings are seen to improve sharply going forward.
- Our Target Price is pegged to 9.2x FY21F (Jun) EPS, which is set at a discount to the 23x peer average.
1HFY20 revenue rose 28% y-o-y, driven by higher volume of gloves produced and sold.
- This was made possible from improved production efficiency, and UG Healthcare (SGX:41A)’s expanded global distribution network.
- Geographically, 1HFY20 revenue rose mainly due to South America – its customer base in Brazil is dental and hospital.
GPM fell y-o-y.
- UG Healthcare had commenced its programme on major modification and upgrading of some production lines since Jun 2019, with completion scheduled in Jun 2020. This is aimed at raising overall production efficiency.
- The increase in maintenance costs from the modification of production lines resulted in 1HFY20 GPM falling 2.5ppts to 18.4%.
Management said the recent COVID-19 outbreak has led to UG receiving a surge in orders for latex and nitrile gloves.
- Whilst this slightly delayed the modification of certain production lines, UG Healthcare remains on track to achieve optimal utilisation with existing production capacity of 2.9bn gloves pa in this FY. In addition, some 300m gloves pa new capacity is expected to come onstream in FY21F.
UG’s earnings expected to surge.
- Given the weak 1HFY20 earnings, we cut our FY20F net profit by 6% to SGD5m. This assumes 2HFY20F net profit of SGD4.1m, 5x that of 1HFY20.
- We believe the current strong glove demand will lead to higher ASP for 2HFY20F and also into 1HFY21F. Together with higher volume output, UG Healthcare’s earnings are expected to surge going forward.
- Our Target Price is pegged to 9.2x FY21F EPS, a discount to peer average forward P/E of 23x – this factors in UG Healthcare’s much smaller production output vs peers, most of which are listed on Bursa Malaysia.
- See UG Healthcare Share Price; UG Healthcare Target Price; UG Healthcare Analyst Reports; UG Healthcare Dividend History; UG Healthcare Announcements; UG Healthcare Latest News.
- Key risks include higher gas and raw material prices, which could narrow margins going forward.
Lee Seng Choon CFA
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-02-21
SGX Stock
Analyst Report
0.33
UP
0.300
