Analysts from RHB Group Research and CGS-CIMB Research have given mixed reactions to UG Healthcare’s announcement on July 12 that it was halting operations of its manufacturing plants in Seremban temporarily due to Malaysia's Enhanced Movement Control Order (EMCO) from July 9 to July 22.
See also: UG Healthcare to see further 2.4% drop in glove production due to EMCO
RHB’s Singapore research team views the development as negative to UG Healthcare’s near-term earnings. The company disclosed that the plant closure will affect its production by 80 million pieces of gloves, or 2.35% of total production.
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 the group’s annual production capacity of 3.4 billion pieces of gloves.
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 UGHC’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 earnings per share (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 believes that the announcement by UG Healthcare will have little effect on its share price. “We see limited share price reaction to UGHC’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. “UG Healthcare’s valuation is undemanding, trading at 4.6 times 2022 P/E while being supported by net cash of $50 million,” he highlights.
Overall, Ong remains neutral on the rubber gloves sector, the downtrend in ASP and near-term uncertainties on output.
For more stories about where the money flows, click here for our Capital section
Noting that some 58% of Malaysia-produced gloves are manufactured at plants located in Selangor, Ong views that the overall production impact in Malaysia is now likely higher given the imposition of EMCO in more Selangor districts, as well as ongoing manpower limitations in other states.
“Should the operation suspension in EMCO districts be extended beyond the initially announced two weeks, we see longer-term repercussions, where global glove buyers may have no choice but to turn to glove makers in other countries, such as Thailand, China and Vietnam, to secure glove supplies and/or as alternative suppliers,” he remarks.
“Riverstone Holdings remains the least impacted glovemaker (by the EMCO) under our glove coverage, as most of its operations are located in Taiping, Perak,” he adds.
Shares in UG Healthcare closed down 0.5 cents or 0.89% lower at 55.5 cents on July 13.
Photo: UG Healthcare
