RHB Group Research has reiterated its “neutral” rating for UG Healthcare albeit with a lower target price of 27 cents, from 37 cents previously.
The way the RHB team sees it, UG Healthcare will book weaker earnings in subsequent quarters due to a downtrend in average selling prices (ASPs).
In a Nov 15 research note, the team highlights that UG Healthcare’s 1QFY2022 ended September performance was heavily impacted by production losses following the halt in manufacturing operations after Malaysia’s Enhanced Movement Control Order (EMCO) was imposed last July.
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In addition, the team notes that UG Healthcare kept its outsourcing activities to minimal levels in 1QFY2022 to manage its inventory loss exposure. For the quarters ahead, management has begun increasing outsourcing efforts, given recent signs of original equipment manufacturing (OEM) price stabilisation and to fulfil internally unmet orders.
However, the company is targeting only 350 million outsourced pieces for the full year as it waits for prices to fully stabilise as well as to account for its own expansion plans. Pre-Covid-19, the company outsourced some 700 million pieces.
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Despite expecting the company to report sequentially lower margins in 2QFY2022, the team views UG Healthcare to be in a better position relative to original equipment manufacturers given more resilient distributor selling prices.
The team anticipates UG Healthcare to maintain positive margins given its entrenched position in markets with lesser price competition from international peers and marketing efforts that were already in place even before the pandemic happened.
“As bargaining power lies with the distributor, we believe UG Healthcare is in a better position to stave off the current OEM pricing pressure, as it can absorb most of the OEM price increase/decreases. Additionally, margins would also be supported by the greater economies of scale, once its planned additional production capacity kicks off in 3QFY2022,” the team explains.
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Given the downtrend in ASPs, RHB has cut his FY2022 to FY2024 earnings forecast for UG Healthcare by 29% to 30%, reflecting lower sales volume and ASP assumptions.
The new target price of 27 cents implies a P/E of 11 times for FY2023, in line with its pre-pandemic five-year mean.
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However, RHB has also reduced its environmental, social and governance (ESG) score for UG Healthcare, noting an increased systemic risk on its reliance on foreign labour.
Meanwhile, CGS-CIMB Research has also lowered its target price for UG Healthcare. Analyst Ong Khang Chuen has reiterated his "add" rating for the counter with a target price of 42 cents, down from 65 cents previously.
In a Nov 16 research note, Ong highlights that UG Healthcare's 1QFY2022 results were below his expectations, with its net profit of $10.6 million making up only 14% of his full-year estimates.
Similar to the RHB team, Ong notes UG Healthcare's ASPs can be more resilient compared to OEM peers given its diverse product mix and strong downstream distribution network, especially in emerging markets such as Africa and South America.
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He has cut his FY2022 to 2024 earnings per share forecast by 32% to 42% to account for lower ASP assumptions, which underpins his lower target price. Nonetheless, Ong notes that valuation is undemanding at 5.5 times 2022 earnings, supported by the company's net cash of $53.2 million as of end-FY2021, which makes up some 40% of UG Healthcare's market capitalisation.
As at 4.26pm, shares in UG Healthcare are trading up 0.5 cents or 1.75% higher at 29 cents.
Photo: UG Healthcare
