UG HEALTHCARE CORPORATIONLTD (SGX:8K7)
UG Healthcare - Another Blockbuster Quarter
- UG Healthcare (SGX:8K7)'s 1H21 PATMI jumped 64x y-o-y to S$54.9mn as revenue tripled to S$159mn, beating our forecast by 22%. Gross margins leapt from 18% to 62% y-o-y as selling prices rose more than 1.5x to S$117 per 1,000 pieces. UG Healthcare sells both nitrile and latex gloves.
- Maintain BUY. We raise our UG Healthcare FY21e PATMI forecast by 28% to S$107.8mn to account for higher glove selling prices and margins.
- Our target price for UG Healthcare remains pegged at a 30% P/E discount to the Big 4 glove makers’ FY22e valuations. As rubber glove valuations have compressed to around 10x P/E, our target P/E for FY22e drops from 14x to 7x. This lowers our target price from S$1.35 to S$1.03.
Positives
Higher selling price drove revenue growth.
- UG Healthcare's 1H21 revenue tripled y-o-y to S$159mn with an estimated 20% growth in volume and 1.5x jump in prices. Sales to China spiked 457% y-o-y as customers stocked up ahead of winter and the festive season.
Gross margins remained robust.
- UG Healthcare's 1H21 gross margin was 62%, triple that of 1H20 as glove prices skyrocketed. q-o-q, margins expanded from 60.6% in 1Q21 to 63.6% in 2Q21.
Record earnings bolstered cash.
- UG Healthcare's cash from operations rose to S$45.9mn. The company now has net cash of S$32.5mn, a major reversal from net debt of S$37mn a year ago. UG Healthcare announced a special dividend of S$0.00105 and a total payout of S$0.645mn.
Negative
Some lag in deliveries and higher costs.
- There have been shipment delays. As a result, inventories almost doubled in the past six months to S$57mn. Inventories were predominantly finished goods on transit to Europe. Container constraints are expected to ease only after February. Shipping rates to Europe have catapulted almost 5-fold to around US$10,000 per container. Even then, shipping rates only account for around 2% of UG Healthcare’s selling prices.
Outlook
- Earnings are still expected to grow q-o-q as prices continue to climb in 2021. We also see other growth drivers for UG Healthcare even if glove prices taper off.
- Firstly, production capacity will expand by 35% y-o-y to 4.6bn pieces in FY22e.
- Secondly, exposure to emerging markets and low penetration rates could provide sources of growth.
Other updates:
- ASPs for nitrile and latex gloves are around US$130-140 and US$90-95 per 1,000 pieces respectively. Demand is still outstripping supply. Latex prices can climb faster in 2021, driven by emerging markets.
- Securing sufficient foreign workers will be a priority if UG Healthcare expands further. Every week, workers have to undergo COVID-19 antigen tests.
- UG Healthcare’s pricing policy is not to “max out” prices to customers. It emphasises supporting long-term dedicated customers during this period of tight supply.
- UG Healthcare’s priority is to conserve cash for expansion that requires new land and downstream capacity such as warehouses.
- Nitrile raw material prices are starting to stabilise.
- An additional 500mn of capacity to 3.4bn pieces will come on stream in April 2021. A new 1.2bn capacity plant is under construction with commissioning expected in 1Q22 (Jul-Sep 2022). UG Healthcare is studying plans for expanding above 4.6bn.
Maintain BUY with lower target price of S$1.03, from S$1.35
- See UG Healthcare Share Price; UG Healthcare Target Price; UG Healthcare Analyst Reports; UG Healthcare Dividend History; UG Healthcare Announcements; UG Healthcare Latest News.
- We continue to value UG Healthcare at a 30% discount to the Big 4 glove makers (Top Glove (SGX:BVA), Hartalega, Supermax, Kossan Rubber). Historically, UG Healthcare’s discount was around 40%. As industry valuations have corrected to around 10x P/E, our target P/E for FY22e drops from 14x to 7x. This lowers our target price from S$1.35 to S$1.03. See comparison of UG Healthcare with peers including the Big 4 glove makers as well as Riverstone (SGX:AP4) in PDF report attached below.
- We raise our UG Healthcare FY21e PATMI forecast by 28% to S$107.8mn to account for the continuous rise in its ASPs and margins. Our FY22e PATMI assumes a 24% y-o-y contraction in ASPs to around S$80 per 1,000 gloves. We also assume a 15% increase in production costs in FY22e.
See also recent SGX market update: SGX Listed Medical Suppliers Continued to Trade Actively in January 2021.
Paul Chew
Phillip Securities Research
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https://www.stocksbnb.com/
2021-02-08
SGX Stock
Analyst Report
1.03
DOWN
1.350
