Excerpts from CGS-CIMB report
Analyst: ONG Khang Chuen, CFA
|Higher ASPs on the cards
■ We reiterate our positive view on UG Healthcare Corp (UGHC) as we believe higher ASPs are on the cards given the surge in glove demand.
■ Despite the recent rally, we believe UGHC’s valuation remains attractive at 11.2x CY21F P/E.
Reiterate Add with a higher TP of S$2.10.
Quantum of ASP hike likely to be higher than expected
Our recent channel checks suggest that Malaysian-based glove makers have hiked their average selling prices (ASPs) at a faster rate than our forecasts.
"Our FY20-22F EPS is lifted by 9.2%-57.2% mainly to account for higher ASPs."
-- ONG Khang Chuen, CFA"We forecast UGHC’s current ASPs to hold up till 1Q21, before a gradual normalisation of prices as higher industry supply kicks in.
For example, we gather that Supermax’s ASPs likely saw a c.35% qoq increase in the Apr-Jun 2020 quarter.
We believe this reflects the urgent demand for gloves, as daily new cases of Covid-19 worldwide continue to be on an uptrend.
We now impute a 20% ASP growth qoq for UGHC’s own brand manufacturing (OBM) gloves (which accounts for c.70% sales volume) in 4QFY6/20F and 1QFY21F into our model.
Forecasting record-breaking 2HFY20F results
UGHC is set to announce its 2HFY6/20F results by mid-Aug 2020.
We expect UGHC to record a sequentially stronger net profit of S$10.1m in 2HFY20F, a 11.9x jump on a hoh basis.
This will be mainly driven by:
|1) higher ASPs,
2) lower raw material prices, and
3) cost savings from internal efficiency enhancements and better economies of scale.
Our forecasted EBITDA margins for 2HFY20F/FY21F stand at 19.0%/27.2%, at the lower-end of glove makers under our coverage.
|Reiterate Add, with a higher TP of S$2.10
UGHC remains our preferred pick among the Singapore-listed rubber glove sector, due to its undemanding valuation (a c.60% discount to the Malaysia-listed glove sector average CY21F P/E of 29.3x) and OBM business model, which allows it to garner stronger ASP upside potential vs. its peers given the current strong surge in glove demand.
Our TP is lifted to S$2.10, still pegged to 15.0x CY21F P/E to reflect the current favourable operating environment for glove players.
Potential re-rating catalysts include further price hikes; downside risks include earlier ASP normalisation.
Full report here.