UG Healthcare

Price target:

CGS-CIMB “buy” $4.80 Glove maker’s earnings might surge 50 times

CGS-CIMB analyst Ong Khang Chuen says he “remains positive” on UG Healthcare (UGHC) as he believes the global shortage of gloves will persist till at least end 2021, given the “gravity” of the Covid-19 outbreak.

On the back of continued demand for gloves due to the acceleration of the pandemic globally and the possibility of a second wave of infections in Europe, inventory levels across the supply chain — notably for distributors and end-users — remain low due to extended order lead times for glove manufacturers.

He expects glove demand to remain high in the medium term even with the eventual discovery of a vaccine.

In a Sept 25 report, Ong estimates a jump of 50 times y-o-y in the company’s 1QFY2021 net profit to $15.7 million. Accordingly, he also expects “even stronger earnings” in subsequent quarters ahead, and forecasts UGHC to record net profit of $70.5 million (a 400% growth y-o-y) in FY2021.

“We estimate ASPs could rise by 10% to 15% monthly between September to November 2020, versus 10% to 12% monthly from May to August. We understand the recent hike in nitrile glove (around 40% of FY2020 revenue contribution) prices was catalysed by raw material shortages,” he says.

“Meanwhile, latex glove (around 50% revenue contribution) prices are also on the rise as more end-users from developed countries are increasingly open to switching from nitrile to latex gloves given the long order lead time for nitrile. We forecast UGHC to record ASP growth of 69% y-o-y in FY2021,” he adds.

Ong has maintained his “add” or “buy” call on the counter with an unchanged target price of $4.80.

“UGHC remains our preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation (a 52% discount to the Malaysia-listed glove sector average 2021 P/E of 16.7 times) and OBM business model, which allows it to garner stronger ASP upside potential versus its peers,” he adds.— Lim Hui Jie