• UG Healthcare's 2QFY21 net profit of S$32.3m (a 58-fold increase y-o-y) was above expectations, despite logistical disruptions that temporarily impacted sales volume.
• We continue to see stronger quarters ahead as ASPs remain on an uptrend. UG Healthcare could leverage on favourable industry trends to expand capacity.
• Reiterate ADD and target price of S$1.70. UG Healthcare is trading at an undemanding valuation of 6.1x CY22F P/E (a 55% discount to its Malaysian peers).

UG Healthcare's 2QFY21 Results Above Expectations

• UG Healthcare (SGX:8K7)’s 2QFY21 (Oct 2020 to Dec 2020) net profit of S$32.3m, +42% q-o-q, a 58-fold increase y-o-y was ahead of expectations, as we had forecast a S$30m net profit for the quarter (1HFY21 was 53.3% of our FY21F forecast).
• The stronger profitability was led by continued ASP hikes, which drove topline growth to S$88.2m (+24% q-o-q, +228% y-o-y) and further margin expansion during the quarter. This is despite near-term logistical disruptions and shipping delays, which caused lower revenue recognition in the quarter (as evident from UG Healthcare’s inventory level rising 70% h-o-h to S$57.4m as of end-1H21).

Stronger Quarters Ahead Due to Further Rise in ASPs

• On the back of strong global glove demand, UG Healthcare expects its ASPs to rise further in coming months, albeit by a smaller quantum given the high base.
• We estimate ASPs grew by 5%/8% monthly in Jan/Feb 21, respectively, supported by the narrowing price gap for gloves between developing and developed countries. We believe quarterly earnings can grow further in coming quarters, as ASP hikes more than offset higher raw material prices and shipping costs.

Further Capacity Expansion on the Cards

• Planned capacity expansion of 500m pcs/annum is on track to come on stream by Mar 2021, but construction progress of the new factory for additional 1.2bn pcs/annum capacity has been delayed by Malaysia’s second movement control order (MCO).
• We estimate a three-month delay and expect the plant to be fully commissioned by end-1QFY22F, after which UG Healthcare’s total manufacturing capacity will reach 4.6bn pcs/annum (+59% y-o-y).
• Leveraging on the industry’s favourable demand-supply dynamics and UG Healthcare’s strengthened balance sheet (net cash of S$32.5m as of end-1HFY21), we see possibility of further production capacity expansion in CY22F.

Reiterate ADD and Target Price of S$1.70

• Reiterate ADD. UG Healthcare remains our preferred pick in the Singapore-listed glove sector, given its relatively cheaper valuation and our expectations of higher normalised profits, backed by a 59% y-o-y manufacturing capacity expansion in CY21F.
• We lift our UG Healthcare's FY21-23F earnings per share forecasts by 0.1%-12.5% to reflect higher ASP assumptions; our target price is unchanged at S$1.70, still pegged to 13.2x CY22F P/E (a 55% discount to its Malaysian peers).
• Potential re-rating catalysts include widespread vaccine availability for COVID-19.

Source: CGS-CIMB Research - 5 Feb 2021