| CGS-CIMB says it believes the share price pullback for glove makers in recent days was mainly due to profit-taking caused by news flow on the positive development of vaccines. But in reality, there continues to be a global shortage of gloves and this could persist late into 2021. |
Excerpts from CGS-CIMB report
Analyst: ONG Khang Chuen, CFA
■ Reiterate Add with an unchanged TP of S$4.80 (15x CY21F P/E). UGHC remains our preferred pick among Singapore-listed glove companies. |
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Global shortage of gloves to persist
We believe the global glove shortage will persist till at least end-CY21F, given the gravity of the Covid-19 outbreak and limited new supply in the coming months.
Our recent channel checks suggest that end demand remains strong as the pandemic appears to be accelerating worldwide, and European countries are preparing for a second wave of infections.
Order lead times for glove manufacturers are further extending (currently till at least 1HCY21F), while inventory levels across supply chain (distributors, end-users) remain low.
We expect glove demand to remain high in the medium term even with the eventual discovery of a vaccine, given
| 1) current vaccine manufacturing and distribution constraints hampering mass availability, 2) structural increase in glove demand given increasing hygiene awareness, and 3) a need to restock inventory across supply chains. |
UG Healthcare: Glove production capacity to be expaded to 4.6bn pcs/annum by end-Jun 2021 (+59% yoy). Photo: Company
Faster pace of ASP hikes
UGHC has recently seen an accelerated hike in selling prices.
We estimate ASPs could rise by 10-15% monthly between Sep to Nov 2020, versus 10-12% monthly from May to Aug.
We understand the recent hike in nitrile glove (c.40% of FY20 revenue contribution) prices was catalysed by raw material shortages.
Meanwhile, latex glove (c.50% revenue contribution) prices are also on the rise as more end-users from developed countries are increasingly open to switching from nitrile to latex gloves given the long order lead time for nitrile.
We forecast UGHC to record ASP growth of +69% yoy in FY21F.
1QFY6/21F preview: 50x jump in net profit
UGHC is set to release its quarterly business update in early Nov; we estimate a net profit of S$15.7m for 1QFY6/21F (50x jump yoy).
We expect even stronger earnings in subsequent quarters, and forecast UGHC to record S$70.5m net profit (+400% yoy) in FY21F, driven by:
i) further ASP increase,
ii) higher sales volume (with +59% yoy production capacity expansion in FY21F), and
iii) higher economies of scale.
 Analyst Ong Khang Chuen, CFAWe reiterate our Add call and TP of S$4.80, still pegged to 15.0x CY21F P/E. UGHC remains our preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation (a 52% discount to the Malaysia-listed glove sector average CY21F P/E of 16.7x) and OBM business model, which allows it to garner stronger ASP upside potential vs. its peers. Potential re-rating catalysts include higher-than-expected increase in selling prices; downside risks include earlier-than-expected widespread availability of a vaccine for Covid-19 |
Full report here.
