Although glove prices are slowly moderating due to increased global supply, UG Healthcare is “too cheap to ignore”, says CGS-CIMB Research analyst Ong Khang Chuen. 

While Ong maintains his “add” call on the company, he is lowering the target price to $1.20 from $1.70 as prices are expected to trend downwards. 

“UG Healthcare continues to enjoy tailwinds of higher glove prices, and valuation is undemanding at 5.4x 2022F P/E, supported by net cash of $50 million,” writes Ong in his May 11 note. 


Read: UG Healthcare remains attractive 'buy' even as target price lowered: RHB


 

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“Given the increase in global glove supply with incoming capacity from new and existing glove makers, we understand that glove prices have generally started to taper off since March 2021,” writes Ong. 

UG Healthcare’s average selling price (ASP) is expected to normalise at a slower pace in 4QFY2021 compared to peers, as Ong believes its original brand manufacturing (OBM) model allows it to have more control over pricing. 

“Our FY21F forecast remains intact as we had previously factored in monthly ASP declines since April; we continue to expect UG Healthcare to report a stronger profit sequentially in 4QFY2021 as production capacity growth offsets the negative impact from ASP decline,” says Ong.

UG Healthcare owns and operates an extensive downstream network of distribution companies with a local presence in Europe, United Kingdom, USA, China, Africa, South America, Japan, Korea and Canada, where it markets and sells its own proprietary Unigloves brand of disposable gloves. 


See also: UG Healthcare exceeds expectations in 2Q21, analysts optimistic


 

UG Healthcare also distributes ancillary products including surgical gloves, vinyl and cleanroom disposable gloves, face masks and other medical disposables.

The group’s 3QFY2021 ended March 31 net profit of $34.3 million (+6% q-o-q, a 56-fold increase y-o-y) was in line with CGS-CIMB’s expectations. Despite continued logistical disruptions and shipping delays which caused lower revenue recognition in the quarter, margins surprised on the upside. 

Meanwhile, PhillipCapital Research head Paul Chew is more cautiously optimistic. While Chew maintains “buy” on UG Healthcare, he lowers the target price to 85 cents from $1.03 previously owing to a cut in FY2022F earnings.

“With glove prices trending down, buyers will not hold much stock. Some customers are already de-stocking from two months’ inventories to just a week,” writes Chew in a May 14 note. 

“De-stocking plus aggressive pricing by manufacturers from China have created a peak in glove prices. China’s nitrile producers are new with less established distribution channels. They are offering lower prices to penetrate new markets and expanding aggressively. Manufacturers in Malaysia and Thailand are lowering prices to maintain their distributor customers,” he adds. 

Container shortages are also stretching out delivery times, he notes. “Shipments that typically take one month have extended to three months. The worst hit are countries such as Brazil where freight rates are lower than in developed countries, such as the US and Europe.”

Chew raises FY2021F PATMI by 7% to $115.4 million for higher margins and lower operating expenses. FY2022F PATMI is lowered by 17% to $74.7 million as we cut gross margins by 5% points to 37%. 

“This is around 40% below the margins in FY2021F as build in a buffer for uncertain glove prices. The jump in capacity plus exposure to low-penetration markets such as Brazil, China and Africa should enable UG to support revenue growth,” he writes.

As at 3.54pm, shares in UG Healthcare are trading 3 cents higher, or 4.48% up, at 70 cents.