• We reiterate our positive view on UG Healthcare (SGX:41A) as we believe higher ASPs are on the cards given the surge in glove demand.
• We now impute 20% ASP q-o-q growth for UG Healthcare’s OBM gloves in 4QFY6/20F and 1QFY21F into our model. Our FY20-22F EPS is lifted by 9.2%-57.2%.
• Despite the recent rally, we believe UG Healthcare’s valuation remains attractive at 11.2x CY21F P/E.
• Reiterate ADD with a higher Target Price 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. For example, we gather that Supermax’s ASPs likely saw a 35% q-o-q 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 q-o-q for UG Healthcare’s own brand manufacturing (OBM) gloves (which accounts for 70% sales volume) in 4QFY6/20F and 1QFY21F into our model. We forecast UG Healthcare’s current ASPs to hold up till 1Q21, before a gradual normalisation of prices as higher industry supply kicks in.
• Our FY20-22F EPS for UG Healthcare is lifted by 9.2%-57.2% mainly to account for higher ASPs.

Forecasting Record-breaking 2HFY20F Results

• UG Healthcare is set to announce its 2HFY6/20F results by mid-Aug 2020. We expect UG Healthcare 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 Target Price of S$2.10

• UG Healthcare remains our preferred pick among the Singapore-listed rubber glove sector, due to its undemanding valuation (a 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 Target Price for UG Healthcare 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.
• (UG Healthcare is one of the best performers among the top 100 most active stocks in 1H20 as highlighted in SGX market update: Singapore’s Most Defensive Stocks in 1H20)

Source: CGS-CIMB Research - 8 Jul 2020