UG Healthcare

Price target:

PhillipCapital “buy” 32 cents CGS-CIMB “add” 42 cents

Rosy outlook ahead

Analysts are positive on UG Healthcare Corp (UGHC) following its latest 3QFY2022 ended March results, even though its earnings dropped 68.9% y-o-y to $10.7 million while revenue was down 31.2% y-o-y to $64.3 million, no thanks to lower selling prices.

UGHC says the impact was mitigated by its ownbrand manufacturing (OBM) model, as it produced higher volume on its own at 3.4 billion pieces of gloves per year. “The ramp-up of our productivity in the second quarter (October–December 2021), following the temporary closure and 60% manpower capacity in the first quarter (July–September 2021), allowed us to record higher revenue sequentially in 3QFY2022,” says Lee Jun Yih, executive director and finance director of UG Healthcare.

Despite the lacklustre 3QFY2022 ended March 2022 results, CGS-CIMB Research is keeping its “add” call with a target price of 42 cents. According to analyst Ong Khang Chuen, the group’s OBM business model

is bearing fruit. The management has also noted that with free on board (FOB) pricing falling to about US$22 ($30) to US$23 per carton, distribution margins are still stronger than pre-pandemic levels.

Meanwhile, UGHC’s new capacity will be commissioned gradually from May onwards. But labour shortage may be a constraint on the pace of production ramp, hence Ong has cut FY2022 EPS forecast by 7.1% on lower volume assumption.

“Nevertheless, we continue to believe that with a significantly expanded production scale and strengthened customer base in end-markets, UG Healthcare can achieve much stronger financial performance compared to pre-Covid levels even as glove pricing fully normalises in the upcoming quarters,” adds Ong.

PhillipCapital too is reiterating its “buy” recommendation on UG Healthcare with a target price of 32 cents. On a q-o-q basis, analyst Paul Chew noticed that gross margins are starting to stabilise after a euphoric 58% in FY2021.

Chew warns of aggressive competition from Chinese manufacturers, which suggests excess capacity or inventory. As such, Chew expects the group to look to outsource their nitrile customer orders from these lower-cost factories. The low prices will allow the distribution business to enjoy attractive margins. UG Healthcare has built up a distribution network, namely in Europe, for nitrile gloves. The new plant will raise the production capacity of latex gloves and support earnings in FY2023. According to Chew, the major challenge in FY2023 will be cost pressures from higher minimum wages (effective May 1) and the increase in gas tariffs.

“After four quarters of falling glove prices, we believe stability has started to creep in. UGHC’s new capacity, flexibility to outsource and strong branding and distribution network in emerging markets will allow the company to stabilise earnings,” says Chew.

However, Chew is remaining cautious on the group’s labour issues, which the group’s ability to ramp up production will highly depend on. —