The best quarter is yet to come for UG Healthcare, say analysts at RHB Securities Singapore Research team.
Their comments come after the glove manufacturer’s better-than-expected earnings for 1QFY2021 September, where its profits came in at $22.7 million, over 70 times the $305,000 reported in the previous year.
See: UG Healthcare's earnings surge over 70x to $22.7 mil for 1QFY2021 on higher revenue
“1QFY21 core net profit makes up 36% of consensus and 329% of our full-year FY21 earnings forecast. The outperformance is caused by higher-than-expected Average Selling Prices (ASPs) and sales volume,” the RHB analysts say.
Agreeing, CGS-CIMB Research Securities’ analyst Ong Khang Chuen says the higher ASPs led to a topline increase of 170% year-on-year, while gross profit margin surged 41.7 percentage points from the year before to 60.6%.
He had expected the counter’s 1QFY21 earnings to come in at $15.7 million, or at 32.2% of its full year profits.
This unforeseen turn has increased UG Healthcare’s cash position to $24.1 million in end September, up from $9.3 million at the end of its 4QFY20 in June.
The company has a net cash position of $3 million, giving it better operating profits and cash flows, says Paul Chew, head of research at Phillip Capital.
Looking ahead, the analysts predict that the global demand for gloves will remain high, as the pandemic worsens in several countries.
However, there is an acute shortage of gloves, even at UG Healthcare. Inventory levels at its distribution companies remain low and “have to managed on a very tight schedule based on just-in-time delivery,” says CGS-CIMB’s Ong.
He reckons the company will further hike its ASPs by 10 -15% between October and December, before they trend higher in 3QFY21 starting in January 2021. The translates to a blended ASP growth of 131% year-on-year in FY21F and a 153% increase in its topline to $364.4 million.
Meanwhile, a global shortage in the raw materials used in the production of gloves has pushed prices up in the recent months. For instance, the prices of nitrile butadine, a key input, has surged between 10 – 15% monthly in 2QFY21, notes Ong.
He does not see this as a major concern, as he foresees that the “hike in ASPs will be more than sufficient to offset the higher raw material prices”.
His optimism also follows the company’s actively engagement of its suppliers, that has resulted in additional supply commitments for its upcoming 500million pieces/annum capacity expansion in Mar 2021.
This will give the company a total production capacity of 3.4 billion gloves per annum – up from its current 2.9 billion annual production.
“This is more aggressive than its original plan of expansion by 300m production per annum to 3.2 billion,” observe the RHB analysts.
They add that the company has plans to further expand their annual production capacity by 1.2 billion through the construction of a new facility at a newly acquired land parcel. With this, it will have a total annual production capacity of 4.6 billion gloves by end 2021.
To this end, CGS-CIMB’s Ong, Phillip Capital’s Chew and the analysts from RHB, and have unanimously posted ‘buy’ calls on UG Healthcare at target prices of $1.70 and $1.35 and $1.39 respectively.
“UG Healthcare remains our preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation (a 65% discount to the Malaysia-listed glove sector average Calendar Year 22F P/E of 22.0x) and OBM business model, which allows it to garner stronger ASP upside potential versus its peers,” explains Ong.
He estimates that his $1.70 target will give the counter a 76.2% upside from its 96.5 cent price on Nov 6.
The RHB team’s $1.39 call - which gives a 41.8% upside – stems from expectations that UG Healthcare will benefit from “stable glove demand of 8 -10% per year, even without Covid-19”.
Meanwhile, Chew says his $1.35 call is based on a 30% discount to the four big glove makers.
However, he flags a concern that visibility for UG Healthcare’s earnings in FY22 is limited.
“Given uncertainties surrounding the sustainability of its record margins and selling prices when the pandemic winds down, we value UG Healthcare on more normalised earnings in FY22e. We already incorporate a 24% decline in ASPs and 25 percentage point drop in Gross Profit margins. Volume growth is expected to be its major earnings driver that year,” Chew points out.
Shares in UG Healthcare closed up 0.5 cents or 0.518% at 97 cents on Nov 9.
