SINGAPORE (June 23): CGS-CIMB Research is rating the medical equipment and services industry “overweight” amid the Covid-19 pandemic.

In a Monday report, lead analyst Ong Khang Chuen says, “As the world grapples with Covid-19, it faces a new normal until an effective and widely-available vaccine or treatment is developed, in our view. Even as nations emerge from Covid-19 lockdown, we believe there is still a need for more testing kits and personal protection equipment (PPE) to ensure a safe reopening.”

According to studies by the World Health Organization (WHO), people with coronavirus are most infectious at the point when they first begin to feel unwell, which has made it particularly challenging to control the spread of the disease.

Based on analysis of past pandemics and strategies used by countries to curb the spread of Covid-19, the analyst believes that the world will have to face a new normal until an effective and widely available vaccine or treatment for Covid-19 is developed, which he believes will be in 2021.

“We see potential for resurgence in Covid-19 cases, as countries adopt varying approaches to tackling the pandemic. Some countries that have eased lockdown measures and reopened their economies (such as China and South Korea) are seeing a renewed rise in the number of Covid-19 cases, prompting fears of a potential second wave,” Ong notes.

Although several countries are starting to emerge from lockdown, diagnostic testing and medical supplies remain high in demand. To ensure a safe reopening, there is a need for reliable data to show that the rate of infection is decreasing to manageable levels, and also to ensure that there is sufficient capacity to avoid future infection peaks overwhelming healthcare capacity.

In Singapore alone, Ong estimates the addressable market potential across the value chain of diagnostic testing to come up to $3.9 billion. Meanwhile, Malaysian Rubber Glove Manufacturers Association (MARGMA) estimates global demand for rubber gloves to reach 345 billion gloves in 2020, representing a 16% y-o-y increase.

With that, Ong sees UG Healthcare and Riverstone as direct proxies to the pandemic, while other beneficiaries include IHH Healthcare, Raffles Medical and Venture Corp.

UG Healthcare is a preferred pick with an “add” call and a target price of $1.36. UG Healthcare's undemanding valuation of 8.7 times 2021F price-to-earnings ratio and manufacturing-cum-distribution model allows it to garner stronger ASP upside potential compared to its peers given the current strong surge in glove demand.

Meanwhile, other Singapore listed companies within the value chain of medical testing and PPE include Biolidics, Q&M Dental, Medtecs and Sri Trang.