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.
As such, he expects glove demand to remain high in the medium term even with the eventual discovery of a vaccine.
This is given current vaccine manufacturing and distribution constraints hampering mass availability, a structural increase in glove demand given increasing hygiene awareness, and a need to restock inventory across supply chains.
In a September 25 report, Ong estimates a 50x jump y-o-y in the company’s 1Q21 net profit to $15.7 million. Accordingly, he expects “even stronger earnings” in subsequent quarters ahead, and forecasts UGHG to record net profit of $70.5 million (a 400% growth y-o-y) in FY21F.
The growth, Ong explains, is likely to be driven by a further increase in ASP, higher sales volume, and higher economies of scale.
“We estimate ASPs could rise by 10-15% monthly between Sep to Nov 2020, versus 10-12% monthly from May to Aug. We understand the recent hike in nitrile glove (around 40% of FY20 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% yoy in FY21F,” he adds.
Ong has thus 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 CY21F P/E of 16.7x) and OBM business model, which allows it to garner stronger ASP upside potential vs. its peers,” Ong says.
“Potential re-rating catalysts include higher-than-expected increase in selling prices; downside risks include earlier-than-expected widespread availability of a vaccine for Covid-19,” he adds.
As at 12.43pm, shares of UGHC were trading at $2.61, with a FY21 price-to-book ratio of 3.83 and dividend yield of 1.37%.
