• We reiterate our positive view on UG Healthcare with the prospect of higher-than-expected ASPs in light of strong glove demand.
• We forecast UG Healthcare to report an 11.9x h-o-h jump in net profit for 2HFY20F, and expect an even better showing in FY21F.
• Despite the recent rally, we believe UG Healthcare’s valuation remains attractive at 12.9x CY21F P/E.
• Reiterate ADD with a higher Target Price of S$3.00.

UG Healthcare's 2HFY20 Preview: 11.9x Sequential Jump in Net Profit

• UG Healthcare (SGX:41A) is set to release financial results on 11 Aug; we estimate a net profit of S$10.1m for 2HFY20 (Jan 2020 to June 2020), an 11.9x jump on a h-o-h basis. This was likely driven by:
  1. higher ASPs,
  2. higher sales volume, and
  3. cost savings from internal efficiency enhancements and better economies of scale.
• However, we believe that 2HFY20 did not capture the full impact of Covid-19 as glove makers only started to hike ASPs in late-Apr/early-May 20. We believe UG Healthcare can achieve an even better showing in FY21F.

ASPs Could Increase by More Than Initially Expected

• Our recent channel checks suggest that industry players have hiked their average selling prices at a faster pace in 3QCY20.
• We gather that Top Glove (SGX:BVA)’s ASPs are slated to rise by 25% m-o-m in Aug 20, and it is confident of raising ASPs further by at least 5% m-o-m until end-CY20F. (see also report: Top Glove Corporation - CGS-CIMB Research 2020-07-22: The Show To Go On)
• Kossan also shared that it expects ASPs to rise by 20% in Jul 20 (vs. 2QCY20) and another 20% m-o-m in Aug 20. We believe this reflects the urgent demand for gloves, as daily new cases of Covid-19 worldwide continue to be on an uptrend.
• We conservatively impute +25%/+3% q-o-q ASP growth for UG Healthcare in 1Q/2QFY21F respectively; this raises our FY21-22F EPS by 38.2%-42.8%. Our forecasted EBITDA margins for 2HFY20F/FY21F stand at 19.0%/34.4%, at the lower end of our forecasts for the glove makers under our coverage.

Reiterate ADD, With a Higher Target Price of S$3.00

• UG Healthcare remains our preferred pick among the Singapore-listed rubber glove companies, due to its undemanding valuation (50% discount to the Malaysia-listed glove sector average CY21F P/E of 26.2x) 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 rises to S$3.00, still pegged to 15.0x CY21F P/E (40% discount to peers) to reflect the current favourable operating environment for glove makers.
• Potential re-rating catalysts include better-than-expected demand for gloves and a higher-than-expected increase in selling prices.
• Downside risks include earlier-than-expected availability of vaccine for Covid-19.

Source: CGS-CIMB Research - 30 Jul 2020