|Glove demand continues to be strong. UG Healthcare recently reported a 5X jump in net profit for FY20 (ended June) to S$13.4 million. CGS-CIMB says it expects UG to report another 5X jump for FY21.|
Excerpts from CGS-CIMB report
Analyst: ONG Khang Chuen, CFA
■ Post-recent share price correction, UGHC is trading at 7.7x CY21F P/E (a 58% discount to Malaysian peers).
Reiterate Add, with a higher TP of S$4.80.
Expecting another 5x net profit jump in FY6/21F
We believe UG Healthcare Corp (UGHC) can record another 5x net profit jump in FY6/21F, on the back of strong global glove demand due to the Covid-19 pandemic, leading to:
|i) ASP increase (both at the manufacturing and distribution levels),
ii) higher sales volume (with +59% yoy production capacity expansion in FY21F), and
iii) higher economies of scale.
ASPs still on an uptrend
We believe that the strong showing of a S$12.6m net profit in 2HFY20 did not capture the full Covid-19 impact as glove makers only started to hike ASPs in late-Apr 20.
We understand that UGHC continued to raise ASPs by c.10%-12% monthly between Jul and Sep 2020; this could translate into a net profit of S$15.7m in 1QFY21F (50x jump yoy).
Based on our channel checks, industry players remain upbeat on further price hikes till at least end-CY20F.
Top Glove also recently started giving customers the option to switch orders from nitrile to latex gloves, which has a shorter lead time.
Should more end-users from developed countries shift from nitrile to latex gloves, we think this could catalyse further ASP upside for latex gloves (c.50% revenue contribution for UGHC).
Boosting production capacity to capture demand
UGHC is reaping the fruits of its prior investments in building up its downstream distribution and proprietary brand.
Its downstream network currently has the capacity to handle more than its manufacturing output volume; and we estimate that c.20% of FY20 sales volume was made up of outsourced gloves.
To capture the surge in global glove demand, UGHC plans to expedite its glove production capacity expansion to 4.6bn pcs/annum by end-Jun 2021 (+59% yoy), vs. previously announced 3.2bn pcs/annum.
UGHC remains our preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation (a 58% discount to the Malaysia-listed glove sector average CY21F P/E of 18.4x) and OBM business model, which allows it to garner stronger ASP upside potential vs. its peers, given the current strong surge in glove demand.
We raised our FY21-22F EPS by 45.5%-84.3% on the back of higher ASP assumptions; our TP rises to S$4.80, still pegged to 15.0x CY21F P/E.
Potential re-rating catalysts include higher-than-expected increase in selling prices; downside risks include earlier-thanexpected widespread availability of vaccine for Covid-19.
Full report here.