Glove manufacturer UG Healthcare remains a counter on analysts’ watchlists, despite a 61.3% y-o-y drop in its earnings to $21.2 million in its 1HFY2022 ended Dec 31 2021.
The lower earnings follow a steady decline in the average selling prices (ASP) across all product segments which resulted in lower gross profit margins.
Meanwhile, the price of raw materials fell in tandem with ASPs. For instance, the price of nitrile latex fell significantly to around US$1.10/kg ($1.48/kg) in Feb 2022, from a peak of US$2.40/kg in Apr 2021.
The price of natural latex which was on a decline since 3Q2021 has since picked up to US$1.50/kg recently due to the winter season, analysts from RHB’s small-cap Asean research team observe.
Even so, the analysts note that UG Healthcare’s original brand manufacturer pricing remains resilient, unlike its peers.
“[The company’s] original equipment manufacturer peers had faced significant pricing competition from Chinese producers which have continuously undercut market prices. In contrast, UG Healthcare has benefited from the stickier original brand manufacturer prices, given the distributors’ pricing power, while its margins have remained resilient q-o-q,” RHB’s analysts explain.
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Going forward, the analysts expect UG Healthcare to continue booking weaker earnings given its lower ASP trajectory.
However, they predict that the price erosion should be slightly offset by higher sales volumes, improved economies of scale and an expanded client base for the branded gloves segment.
Paul Chew, who heads the research team at Phillip Capital echoes these sentiments. “We believe that industry glove prices are still slipping in 1QFY2022, but at a slower pace of around 10% q-o-q to US$20 to US$25,” he explains.
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“Some stability is creeping up in glove selling prices. Any rebound in prices will remain elusive due to the huge influx of nitrile capacity, especially from China,” quips Chew.
Chinese manufacturers are seen to be the largest price disrupter in the glove manufacturing industry, thus prompting Malaysian peers to either match or come closer to the lower prices.
The edge that manufacturers from China have is ample capacity, which in turn allows for short deliver times to meet customer orders.
Despite the lower prices that glove manufacturers are working with, Chew believes that UG Healthcare can fare better than its peers by outsourcing more customer orders to third party factories, to take advantage of the lower factory prices.
Other benefits include that the company enjoys higher prices as a distributor to end customers. Such end customers pay a premium due to the smaller order quantities of cartons or pellets, notes Chew.
Additionally, the PhillipCapital analyst observes that the company is experiencing demand for gloves from new industries such as farming and beauty. Demand is also picking up from customers from emerging markets amidst health awareness and a resultant desire for better quality gloves.
Presently, UG Healthcare’s sales of latex gloves to emerging markets like Brazil, China and Nigeria account for around 45% of its total sales, says Chew.
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The company is also in seemingly good stead to fuel these plans given its net cash position of $73.1 million in its 2Q2022 (ended Dec 31 2021), compared to $32.5 million in the corresponding period in the previous year.
However, Chew flags challenges in the form of a further delay in the construction works at UG Healthcare’s new 1.2 billion capacity glove factory in Seramban from June till August this year.
Even so, Chew is upgrading his call on UG Healthcare to “buy” at a target price of 32 cents. This is pegged to a 30% discount to the four big glove makers and implies 5x FY22 P/E, he explains.
“We see value in the share price as the company is trading below its book value of 33.8 cents and 43% of the market capitalisation is net cash,” adds Chew.
Meanwhile, RHB’s analysts are maintaining a “neutral” call at a revised target price of 29 cents. This is up 2 cents from their previous call and is based on a fair valuation of 11x 2023 P/E.
As at 2.10pm on Feb 15, shares in UG Healthcare were trading up 0.5 cents or 1.85% at 27.5 cents.
Cover image: Bloomberg