UG Healthcare

EMCO to impact production

Analysts from RHB Group Research and CGSCIMB Research have given mixed reactions to UG Healthcare’s announcement on July 12 that it is putting a temporary operational halt to its plants in Seremban temporarily due to Malaysia’s Enhanced Movement Control Order (EMCO) from July 9 to July 22.

RHB Singapore views the development as negative to UG Healthcare’s near-term earnings, given how the closure will crimp production by 80 million pieces of gloves, or 2.35% of the total.

This is on top of the estimated productivity loss the group previously announced, bringing the total reduction in productivity to approximately 165 million pieces of gloves or 4.85% of its annual production capacity of 3.4 billion pieces.

To that end, the team has lowered their FY2022 ending June earnings forecast to $55 million, to reflect a lower utilisation rate assumption.

“We have assumed a lower utilisation rate to 85% for FY2022 from 90% due to the EMCO. FY2021 earnings are not affected, given that UG Healthcare’s financial year-end is in June. We also maintain our FY2023 earnings, as we expect the EMCO to be over eventually,” the team writes in a July 13 research note.

The team also views that average selling prices (ASPs) for gloves have peaked in 1QFY2021, given the rising competition from new gloves supply in the market.

Given these factors, RHB has kept its “neutral” rating for UG Healthcare but with a lower target price of 57 cents, down from 61 cents previously.

Meanwhile, CGS-CIMB analyst Ong Khang Chuen has also lowered his EPS forecasts to reflect the lower production. “We believe the negative impact will mainly be reflected in 1QFY2022 and our preliminary estimates point towards c.5.6% downside to our FY2022 EPS forecasts,” he says.

However, Ong sees “limited share price reaction to UG Healthcare’s latest announcement, as it has trended in line with peers since [the] announcement of Selangor EMCO,” he says in a Singapore rubber gloves sector research note on July 12.

He maintains his “add” call for UG Healthcare with a target price of $1.20, citing its undemanding valuation at 4.6 times 2022 earnings while being supported by net cash of $50 million.

Overall, Ong remains neutral on the rubber gloves sector, the downtrend in ASP and near-term uncertainties on output.