Simons Trading Research
UG Healthcare - a Strong Start to the Year
- UG Healthcare's 1QFY21 (Jul 2020 to Sep 2020) net profit of S$22.7m (74-fold increase y-o-y) was 45% above our expectations, due to stronger-than-expected ASP increase.
- Global glove shortage remains acute amid worsening pandemic crisis, and we expect UG Healthcare to be able to raise prices by 10-15% monthly in 2QFY21.
- Reiterate ADD with higher target price. UG Healthcare is trading at an undemanding valuation of 7.5x CY22F P/E (65% discount to Malaysian peers).
UG Healthcare's 1QFY21 Results Above Expectations
- UG Healthcare (SGX:8K7)’s 1QFY21 (Jul 2020 to Sep 2020) net profit of S$22.7m (74-fold increase y-o-y) was above expectations, as we had forecast S$15.7m net profit for the quarter (1Q was 32.2% of our FY21F).
- Key surprise was stronger-than-expected ASP hike, which led 1Q topline to rise 170% y-o-y and GPM to expand by 41.7% pts y-o-y to 60.6%.
Glove Shortage Remains Acute
- We believe global glove shortage remains acute given the worsening pandemic crisis. UG Healthcare said its distribution companies’ inventory levels remain low, and have to be managed on a very tight schedule based on just-in-time delivery.
- We estimate UG Healthcare could further hike its ASPs by 10-15% monthly between Oct and Dec, and think that prices can continue to trend higher in 3QFY21.
- We forecast UG Healthcare to record blended ASP growth of +131% y-o-y in FY21F, boosting its topline to S$364.4m (+153% y-o-y).
Rising raw material costs not a major concern
- Due to supply shortages, we understand that raw material prices have been rising in recent months. According to the management, nitrile butadiene (NBR) prices have seen 10-15% increase monthly in 2QFY21, while latex prices have also inched up slightly. Nevertheless, we continue to expect margin expansion for UG Healthcare in 2QFY21 as we believe the ASP hikes will be more than sufficient to offset the higher raw material prices.
- We forecast UG Healthcare to record EBITDA margins of 54.2%/50.3% in 2Q/FY21F respectively. Management is also actively engaging its suppliers, and has secured additional supply commitments for its upcoming 500m pcs/annum capacity expansion in Mar 2021.
Reiterate ADD on UG Healthcare With Higher Target Price
- Reiterate ADD on UG Healthcare with a higher target price (13.2x CY22F P/E, based on 40% discount to peers) as we roll over our valuation to end-CY22F.
- UG Healthcare remains our preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation (a 65% discount to the Malaysia-listed glove sector average CY22F P/E of 22.0x) and OBM business model, which allows it to garner stronger ASP upside potential vs. its peers.
- Potential re-rating catalysts include stronger-than-expected increase in selling prices; include earlier-than-expected widespread vaccine availability for COVID-19.
Source: CGS-CIMB Research - 6 Nov 2020
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