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UG Healthcare - CGS-CIMB Research 2020-06-22: Put On This Glove; Initiate Coverage With ADD

UG HEALTHCARE CORPORATION LTD (SGX:41A) | SGinvestors.io UG HEALTHCARE CORPORATION LTD (SGX:41A)

UG Healthcare - Put On This Glove; Initiate Coverage With ADD

  • We believe UG Healthcare’s manufacturing cum distribution model allows for higher ASP hike potential amid strong glove demand due to the Covid-19 outbreak.
  • We expect UG Healthcare to benefit from
    1. higher ASPs,
    2. stronger volume, and
    3. higher margins, and forecast net profit to quadruple in FY20F.
  • We believe valuation is attractive at 8.7x CY21F P/E. Initiate with an ADD rating and Target Price of S$1.36, based on 15x CY21F P/E (40% discount to peers).



UG Healthcare - Company Background

  • Established in 1989, UG Healthcare (SGX:41A) is a Malaysia-based glove manufacturer with its own global downstream distribution network that markets and sells disposable glove products under its proprietary “Unigloves” brand.

Upstream manufacturing

  • UG Healthcare has two manufacturing facilities located in Seremban, Malaysia. As of end-FY19, UG Healthcare has a production capacity of approximately 2.9bn gloves per annum. According to its FY19 annual report, UG Healthcare plans to raise its annual capacity by another 300m gloves to 3.2bn gloves per annum by FY21F.
  • While it is expanding production capacity progressively, UG Healthcare is also upgrading its existing production lines and streamlining its product range to improve operational efficiency and technical enhancements to enable better utilisation of capacity and resources.
  • UG Healthcare’s manufacturing business supplies gloves based on demand and orders received from its own distribution companies, as well as from other distributors that are marketing and selling its proprietary UniGloves range of disposable gloves. On top of that, it also acts as an OEM manufacturer for end-users’ brand names if the quantity is sizable.
  • UG Healthcare also outsources generic products to other OEM players to produce its UniGloves brand to meet demand for the product.

Downstream distribution

  • According to UG Healthcare’s FY19 annual report, the company’s strategy has always been to cultivate demand for its proprietary “Unigloves” range of disposable gloves through its downstream distribution companies.
  • The company owns and operates an extensive downstream network of distribution companies, with local presence in Europe, United Kingdom, USA, China, Africa and South America. The Group also distributes ancillary products, including surgical gloves, vinyl, and cleanroom disposable gloves, face masks and other medical disposables. Its distribution companies manage their own local marketing and sales networks, as well as warehousing and logistics infrastructure.
  • During FY19, the Group expanded its distribution infrastructure with the acquisition of land and warehouse building in Brazil, where it was experiencing rapid growth. It also established a distribution company in Chengdu, China to expand its market reach there.

End-users

  • UG Healthcare’s end-customers include:
    • Healthcare providers, including hospitals, dental clinics, nursing homes and hospices;
    • Manufacturers, including those in the automotive and electronics industries;
    • Life sciences players, such as laboratories and manufacturers in those industries;
    • Food and beverage processing companies; and
    • Beauty industry, which includes hair salons and tattoo studios.


UG Healthcare - Investment merits


Glovemaker with a manufacturing-cum-distribution model

  • UG Healthcare is a Malaysia-based glove manufacturer (production capacity of 2.9bn pieces p.a. as at end-Jun 2020) with its own established global downstream distribution network. It distributes its proprietary “Unigloves” brand to more than 50 countries globally, via in-house as well as independent distributors. We estimate that in FY19, glove sales through its OBM business model accounted for 65-70% of total volume sold.
  • Over the past few years, UG Healthcare has been actively investing in building up its downstream distribution network across both developed and developing market, particularly in the North America, South America, Africa and China markets. In May 2018, UG Healthcare acquired a new distribution subsidiary in Brazil to make further inroads to South America.
  • We note that revenue contribution from South America has since grown rapidly, and accounted for 27% of 1HFY6/20 revenue (1HFY19: 11%). As of 1HFY6/20, key geographical markets by revenue contribution are Europe (39%), South America (27%) and North America (16%).

Higher orders and higher ASPs due to Covid-19

  • Our recent channel checks reveal that UG Healthcare has been seeing strong demand for gloves, both from its existing customers, as well as from new buyers. We estimate that UG Healthcare’s manufacturing facilities are currently running at c.85% utilisation rate (FY19: 70-75%) to fulfill orders, and that its order visibility for gloves is up to end-1QCY21F.
  • As with its industry peers, UG Healthcare has been able to raise selling prices of its gloves in view of the surge in demand. But we see a stronger ASP hike potential for UG Healthcare, given its manufacturing-cum-distribution model.
  • For its OEM customer base, we believe that UG Healthcare remains committed to building long-term business relationships with its regular customers, and is raising prices on a more gradual basis. We assume price hikes for OEM customers of c.10% q-o-q in both 4QFY20F and 1QFY21F.
  • For its OBM business (65-70% volume), we estimate price hikes averaged 10% m-o-m on a monthly basis since Feb 2020. On the back of strong ASP increases and higher sales volume, we forecast that UG Healthcare will see topline growth of 42.2%/29.5% y-o-y in FY20F/21F respectively.

Investments in OBM model to pay dividends

  • UG Healthcare’s net margin fell from 9.3% in FY16 to 2.4-5.6% in FY17-19, due to heavy investments to expand its downstream distribution platforms.
  • We see strong margin upside potential in FY20-22F for UG Healthcare, as the company enjoys the fruits of its labour in building up its OBM business. We forecast UG Healthcare’s EBITDA margin expanding 6.8%/7.7% pts y-o-y in FY20F/21F on the back of
    1. higher ASPs,
    2. lower raw material prices, and
    3. cost savings from internal efficiency enhancements and better economies of scale.
  • In addition, UG Healthcare will benefit from the weakening of the Malaysian ringgit against the US dollar, as its operating expenses and purchases are denominated mainly in Malaysian ringgit (RM); while its sales are primarily denominated in US$.
  • For 2HFY20F, we expect UG Healthcare to record a sequentially stronger net profit of S$9.1m (10.8x increase on a hoh basis). We forecast UG Healthcare recording 298%/105% y-o-y growth in net profits to S$10m/S$20.5m, respectively, for FY20F/21F.


UG Healthcare - Financial highlights


Expect strong topline growth in FY20F and FY21F

  • We expect UG Healthcare to see strong topline growth of 42.2%/29.5% y-o-y in FY20F/21F respectively, on the back of strong ASP increases and higher sales volume. Our recent channel checks reveal that UG Healthcare has been seeing strong demand for gloves, both from its existing customers, as well as from new buyers. This is on the back of strong global glove demand owing to the Covid-19 pandemic. We estimate that UG Healthcare’s manufacturing facilities are running at c.85% utilisation rate to fulfill orders, and that its order visibility for gloves is up to end-1QCY21F.
  • We understand that due to the strong demand owing to the Covid-19 outbreak, OEM glove makers are no longer pricing their medical gloves using the typical cost-plus mechanism beginning 2QCY20. Instead, selling prices have been on a sequential uptrend since Mar 2020, despite raw material prices trending lower. We estimate that UG Healthcare raised the prices of its gloves for OEM customers by c.10% q-o-q in both 4QFY20F and 1QFY21F, in line with industry peers. For its OBM business, we estimate that UG Healthcare raised prices by an average of 10% m-o-m every month since Feb 2020.
  • We believe that the demand for gloves is likely to remain firm till end-CY21F, as governments and hospitals will still need to replenish safety stocks after the pandemic is contained. We expect ASPs to gradually normalise starting in 2HFY21F, and hence forecast revenue declining 12.2% to S$148.3m in FY22F.

Stronger margin outlook driven by price hikes

  • We forecast UG Healthcare’s EBITDA margin expanding 6.8%/7.7% pts y-o-y in FY20F/21F. Besides higher ASP, UG Healthcare is also benefiting from a lower raw material price environment. Key raw materials, including latex and nitrile, have been on a downtrend YTD.
  • We also expect cost savings from internal efficiency enhancements and better economies of scale. In addition, UG Healthcare will benefit from the weakening of the Malaysian ringgit against the US dollar, as its operating expenses and purchases are denominated mainly in Malaysian ringgit (RM); while its sales are primarily denominated in US$.
  • For FY22F, we expect a contraction in margins, as we believe ASPs will normalise. Nevertheless, we still forecast an EBITDA margin of 15.6% for FY22F, as we expect the Covid-19 outbreak to accelerate UG Healthcare’s strategy execution in building up its proprietary brand Unigloves, which would enable the company to generate higher value per glove produced in the longer run.
  • Overall, we expect UG Healthcare to record 298%/105% y-o-y growth in net profits to S$10m/S$20.5m respectively for FY20F/21F. Our forecast implies a S$9.1m net profit for 2HFY20F, a 10.8x jump on a hoh basis.

We expect a dividend payout ratio of 20%

  • Although UG Healthcare does not have a fixed dividend policy, it disclosed in its prospectus that it intends to distribute dividends of at least 20% of NPAT each financial year. We forecast that UG Healthcare will maintain a dividend payout ratio of 20% in FY20-22F. This translates to a DPS of 2.0-4.9 Scts for FY20-22F, or a dividend yield of 1.3-2.6%.

Balance sheet

  • As of end-FY19, UG Healthcare had a net gearing ratio of 35.5%. We note that UGHC has a high interest coverage ratio of 7.2x-15.9x between FY20-22F. As we expect strong profitability over FY20-21F, we believe UG Healthcare’s net gearing level will trend downwards. We expect UG Healthcare to return to a net cash position in FY22F.

Peer analysis

  • UG Healthcare’s margin levels are generally lower than peers, likely due to its smaller production scale, hence lower ability to reap economies of scale. We note that the gap between margin levels has widened in FY17-19, likely due to UG Healthcare’s heavy investments to expand its distribution infrastructure, which resulted in higher sales and marketing, as well as administrative, expenses.
  • We see strong margin upside potential in FY20-22F for UG Healthcare, as the company enjoys the fruits of its labour in building up its OBM business.


UG Healthcare - Valuation & Recommendation


Under-appreciated stock in the glove sector; initiate with ADD rating and Target Price of S$1.36

  • We initiate coverage on UG Healthcare with an ADD rating and Target Price of S$1.36, based on 15x CY21F P/E (c.40% discount to Malaysian-listed peers).
  • We like UG Healthcare for its
    1. attractive valuation (8.7x CY21F P/E) and
    2. OBM business model, which we believe allows it to garner stronger ASP upside potential vs. peers given the current strong surge in glove demand.
  • We value UG Healthcare using the P/E valuation as we think this methodology allows to incorporate near-term catalysts and risks.
  • We believe a 40% discount vs. peers for its P/E multiple is justifiable, given
    1. UG Healthcare’s smaller production capacity, and
    2. relatively weaker track record in terms of profitability.
  • See UG Healthcare Share Price; UG Healthcare Target Price; UG Healthcare Analyst Reports; UG Healthcare Dividend History; UG Healthcare Announcements; UG Healthcare Latest News.
  • Potential re-rating catalysts include further price hikes and stronger-than-expected earnings in the upcoming FY20F results announcement.
  • Key downside risks include earlier-than-expected normalisation of ASPs.

See attached 23-page PDF report for complete analysis on UG Healthcare (SGX:41A).




More reports on SGX listed medical equipments & services companies:





ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-06-22
SGX Stock Analyst Report ADD INITIATE ADD 1.36 SAME 1.36


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