Analysts are turning negative on UG Healthcare Corporation after its earnings for the FY2022 ended June fell 69% y-o-y to $36.8 million. The dip in earnings was mainly due to the lower average selling price (ASP) of disposable examination gloves as the world adjusts to living with Covid-19 as an endemic.
PhillipCapital analyst Paul Chew has downgraded his recommendation to “neutral”, as glove selling prices remained “sluggish”, inching lower on a q-o-q basis. He has also lowered his target price to 20 cents from 32 cents previously. The new target price is pegged to a discount to the big four Malaysian glove makers or an FY2022 P/E of 5x.
“The company is still trading below book value with net cash of $84 million,” he says.
To be sure, UG Healthcare’s patmi for the 4QFY2022 stood below his expectations while its FY2022 patmi stood at 93% of his full-year forecasts.
“The largest drag in 4QFY2022 was the higher operating expenses,” Chew writes. “UG is building up a new sales team in Europe to focus on reusable heavy duty gloves. We expect higher costs in the coming quarters as the company builds a new distribution and brand in the region.”
To this end, Chew has lowered his patmi estimates for the FY2023 by 39% as he sees stable glove prices as “unlikely”.
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He adds: “Competition from China continues to depress nitrile glove prices globally. Demand is also affected by overstocking and slower demand post-pandemic. UG’s strength is the ability to source low-priced gloves from other manufacturers for its trading business.”
Other challenges include new competition in Brazil as the registration and market surveillance of gloves was relaxed, as well as the delayed commencement of UG Healthcare’s factory due to the lack of workers in Malaysia.
“UG is looking to build a new business in reusable industrial gloves for the auto, construction and manufacturing industries. There will be an upfront cost to build the distribution and branding of these gloves,” he writes.
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CGS-CIMB Research analyst Ong Khang Chuen has also lowered his target price on UG Healthcare to 35 cents from 42 cents previously.
The lowered target price is now based on a P/E of 9.6x for the calendar year (CY) 2023, from 11.2x previously.
This is given the current oversupply situation in the global glove industry, says Ong.
Ong has also lowered his earnings per share (EPS) estimates for the FY2023 by 13.8% on lower volume assumptions with the delayed commissioning of UG Healthcare’s new production capacity to October.
That said, the analyst is retaining his “add” call on the company as he sees its original brand manufacturer (OBM) business model allows it to fare better compared to other original equipment manufacturer (OEM) glove manufacturers who are facing pricing pressures in the current landscape.
In addition, UG Healthcare’s 76% y-o-y decline in its 2HFY2022 net profit is deemed “relatively resilient” compared to the big four Malaysian glovemakers’ net profit decline of around 90%.
“We also think that UG Healthcare’s current valuation is undemanding at 2.5x ex-cash CY2023 P/E,” he writes.
As at 11.36am, shares in UG Healthcare are trading flat at 21.5 cents.
