SINGAPORE (Apr 24): RHB is initiating coverage on UG Healthcare with a “buy” recommendation and a target price of 32 cents, as the research house is positive on the long term global demand growth for gloves, with demand rising at a 5.7% CAGR over the past 12 years.
In a Monday report, analyst Leng Seng Choon says, “Our expectations of an appreciating USD vs MYR would also indicate an improved earnings outlook for glove manufacturers.”
The RHB economics team expects USD/MYR to average 4.05 in 2H18 and 4.10 in 1Q19, mainly driven by the view that inflation could surprise on the upside, resulting in higher-than-expected interest rates that could benefit the USD.
The glove sector is a key beneficiary of a stronger USD, as about 100% of sales is USD-denominated.
The group derives two-thirds of its revenue in USD and would be one of the beneficiaries. The other quarter of the group’s revenue is in GBP and one-eighth from CNY.
Globally, Malaysia is the world’s leading supplier of medical rubber gloves, satisfying about 65% of global demand. In 2017, US and China accounted for about 28% and 5% of Malaysia’s total value of rubber products exported respectively.
“As both are net importers of medical rubber gloves from here, we do not expect their trade tariffs to have a significant impact on demand for such gloves,” says Leng.
Going forward, the analyst expects the global glove demand to rise 6-8% per annum.
By June, the group is expanding its capacity by 21% y-o-y to 2.9 billion units per annum, allowing for more production flexibility for both existing and new facilities, thus improving its overall production efficiency.
The group’s management expects annual production capacity to rise further to 3.2 billion units by Jun 2020 – and this would require continued capex over the next two to three years.
In addition, latex prices has fallen, which has contributed positively to margins and helped lower production costs.
Currently, the stock is trading at 8.6 times FY19 earnings, which is sharply lower than the peer FY19 average of 25 times.
“We believe its production growth strategy could bring its P/E closer to its peer average,” adds Leng.
As at 11.50am, shares in UG Healthcare are trading at 20 cents.
