The best is yet to come for UG Healthcare, says CGS-CIMB Securities who is maintaining its “add” or “buy” call on the counter at a revised target price of $4.80.
This is up $1.80 from its previous $3.00 call and is believed to have a 95.9% upside from the counter’s $2.45 price on September 7, analyst Ong Khang Chuen explains.
“We believe UG Healthcare Corp can record another 5x net profit jump in FY6/21F, on the back of strong global glove demand due to the Covid-19 pandemic,” he adds.
Ong’s optimism stems from expectations of: an increase in the Average Selling Prices (ASPs) of gloves – both at the manufacturing and distribution levels, higher sales volume and higher economies of scale.
Things are already looking up for UG Healthcare, with net profit for 2HFY20 ended June coming in at $12.6 million. The latest results do not fully capture the increase in ASPs as glovemakers only increased prices in late April, observes Ong.
More recently, the company has increased ASPs by around 10% to 12% per month. This could translate to a 50% year-on-year surge in net profit of $15.7 million in 1QFY21 ending September, Ong estimates.
He adds that an ever further increase in ASPs may well be around the corner if customers switch from nitrile to latex gloves, which have a shorter lead time.
With some 50% of UG Healthcare’s revenue coming from the sale of latex gloves, Ong says this spells good news for the company.
For now, it seems the company is reaping the fruits of its prior investments in building up its downstream distribution and proprietary brand.
At present, its downstream network can handle more than its manufacturing output volume, says Ong who estimates that some 20% of its FY2020 sales volume came from outsourced glove production.
To this end, the company plans to expedite the expansion of its glove production capacity by 59% year-on-year to produce 4.6 billion pieces per annum by end June 2021, compared to the 3.2 billion pieces it previously announced.
Given UG Healthcare’s upcoming activity, Ong says the counter “remains [a] preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation of a 58% discount to the Malaysia-listed glove sector average of CY21 Price-to-Earnings of 18.4 times”.
Its business model also enables it “to garner stronger ASP potential vis-à-vis its peers,” he adds.
Shares of UG Healthcare was up 10 cents or 4.08% to close at $2.55.
