Analysts from CGS-CIMB Research and RHB Group Research are mixed on UG Healthcare despite posting a “solid” set of results for its FY2021 ended June.
See: UG Healthcare posts record FY2021 earnings of $118.8 mil; proposes 0.506 cent dividend
CGS-CIMB has kept its “add” call but slashed its target price from $1.20 to 65 cents. Meanwhile, RHB kept its “neutral” rating and target price of 57 cents unchanged.
CGS-CIMB analyst Ong Khang Chuen notes that UG Healthcare’s FY2021 earnings of $118.8 million were in line with his expectations. However, he notes that on a q-o-q basis, UG Healthcare’s revenue fell 14%, as end-customers turned more cautious on procurement in view of the downtrend in average selling prices (ASPs) for gloves.
Ong believes that glove ASPs peaked in March and will further decline in the near term - he estimates ASPs to fall some 30% q-o-q in 1QFY2022, driven by increasing price competition on the back of higher glove supply capacity globally. In addition, cautiousness in inventory procurement by distributors and end-customers given the frequent price adjustments over the past half-year will also likely contribute to the decline in ASPs.
To that end, Ong has lowered his year-end ASP assumptions to US$40, US$26 and US$25 for 2021, 2022 and 2023 respectively. However, he believes that UG Healthcare’s ASPs can be more resilient compared to peers, given its diverse product mix and strong downstream distribution network especially in emerging markets such as Africa and South America where international peers are less entrenched.
In addition, Ong highlights that while the enhanced movement control order (EMCO) in Seremban impacted UGHC’s production output in July and August, he believes the company can continue to maintain “flattish” sales volume growth in 1HFY2022 due to its investory buffer and a boost in production capacity by 500 million pieces per annum in April.
His lower target price of 65 cents is underpinned by a switch to a P/E valuation methodology to account for near-term risks with ASP volatility. His target price is based on a 2023 P/E of 11.2 times, which reflects a 30% discount to the glove sector’s historical mean.
Ong believes UG Healthcare’s valuation is undemanding at 6.1 times 2022 P/E, supported by net cash of $49.8 million which makes up around 15% of the company’s market capitalisation.
Meanwhile, RHB’s Singapore research team highlights that UG Healthcare’s FY2021 earnings beat their expectations, driven by higher-than-expected ASPs.
Nevertheless, similar to Ong, the team expects weaker ASPs in the near term. “We believe that long-term gloves consumption growth remains solid due to higher hygiene awareness globally. However, we believe that ASP peaked in 1Q2021 due to rising competition from new supply of gloves in the market. Note that major gloves producers in Malaysia have guided for lower ASP for the next few months,” the team explains.
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The team has kept its forecasts unchanged and reiterate its “neutral” rating.
However, the team also notes that UG Healthcare’s balance sheet is strong with net cash of $53 million or 8.6 cents per share.
Shares in UG Healthcare closed 2 cents or 3.6% lower at 53.5 cents on August 31.
Photo: UG Healthcare
