• UG Healthcare's 3QFY21 net profit of S$34.3m (a 56-fold increase y-o-y) was in line, despite logistical disruptions which continued to hamper sales volume.
• Earnings could continue on an uptrend in 4QFY21, as production capacity growth offsets a gradual decline in ASP.
• UG Healthcare trades at an undemanding valuation of 5.4x CY22F P/E, and backed by net cash of S$50m. Maintain ADD, with a DCF-based target price of S$1.20.

UG Healthcare 3QFY21: Stronger Margins Offset Topline Weakness

• UG Healthcare (SGX:8K7)’s 3QFY21 (Jan 2021 to Mar 2021) net profit of S$34.3m (+6% q-o-q, a 56-fold increase y-o-y) was in line with expectations. 9M21 net profit made up 77% of our FY21F earnings forecast.
• Despite continued logistical disruptions and shipping delays which caused lower revenue recognition in the quarter, margins surprised on the upside. We understand utilisation rate of UG Healthcare’s production plans remained optimal (90-95%) during the quarter, and the higher inventory level (~S$70m as of end-Mar) will be progressively recognised in coming months with gradual easing of shipping delays.

Gradual Tapering Off in ASPs

• Given the increase in global glove supply with stronger profit sequentially in 4Q as production capacity growth offsets the negative impact from ASP decline.

On the Lookout for Further Capacity Expansion

• Capacity expansion of 500m pcs/annum came on stream since Apr 2021, and the new factory for balance sheet (net cash of S$50m as of end-3QFY21), we see the possibility of further production capacity expansion in CY22F.

Reiterate ADD on UG Healthcare With DCF-based Target Price of S$1.20

• Maintain ADD as UG Healthcare continues to enjoy tailwinds of higher methodology to better reflect earnings normalisation in coming years. Our target price for UG Healthcare is lowered to S$1.20, implying 9.9x CY22F P/E.

• Re-rating catalysts include stronger-than-expected demand for gloves.
• Downside risks include steeper glove pricing decline.

Source: CGS-CIMB Research - 11 May 2021