• Reiterate BUY with new SGD0.30 Target Price from SGD0.32, 67% upside.
• Our Target Price is pegged to 11x FY20F (Jun) EPS, which is at a discount to the 19x peer average, factoring in UG Healthcare’s relatively smaller production output.
• Whilst FY19 net profit disappointed, the 47% y-o-y rise in gross profit reflects strength. We believe continued growth in gross margin will strengthen FY20 earnings.

FY19 Revenue and Gross Profit Rose

• UG HEALTHCARE (SGX:41A)'s FY19 full-year revenue was up 17% y-o-y. The new production facility – which achieved full commercialisation at end January – led to additional annual capacity of 500m pieces of gloves. There was overall production efficiency and economies of scale, which contributed to the 47% y-o-y rise in FY19 gross profit.
• GPM rose 4ppts to 20.4% for the full year. Management sees GPM rising further over the next few years on economies of scale.

Weak 4QFY19 Net Profit Despite Higher Revenue

• UG Healthcare’s earnings for this period stood at SGD0.54m (-59% y-o-y), mainly due to higher marketing, distribution, administrative, and finance expenses. This was on top of 4QFY19 revenue rising 20% y-o-y.
• With the Jul 2018 consolidation of its Brazilian subsidiary, costs rose. However, goods sold from parent to subsidiary are not factored as group revenue – unless sold to end customers. This led to 4QFY19 reporting net profit being SGD0.6m weaker.

Slight Delay in Increasing Production Capacity

• Given the ongoing macroeconomic uncertainties, UG Healthcare has postponed – slightly – the initial timing to increase production capacity by another 300m gloves annually. The 3.2bn gloves pa capacity target should now be achieved in FY21 instead of FY20.
• For FY20F, UG Healthcare will upgrade some of its existing production lines to further enhance production efficiency and economies of scale.

FY19 Final Dividend of 0.259 Cents/share

• The company is recommending a FY19 final dividend of 0.259 cents/share. This translates into a payout ratio of 20%. Shareholders have the option of receiving the dividend in scrip or cash. See UG Healthcare's dividend history.

Our Target Price Is Pegged to 11x FY20F EPS

• Our Target Price is pegged to 1119x – this factors in UG Healthcare’s much smaller production output vs peers, most of which are listed on Bursa Malaysia.
• We cut FY20F net profit 13% to SGD5.3m while raising FY20F revenue 9% – this was offset by increased marketing and administrative expenses.
• Key risks include higher gas and raw material prices, which could narrow margins going forward.

Source: RHB Invest Research - 28 Aug 2019