Following a stellar 2QFY2021 performance, analysts have maintained their “buy” or “add” calls on UG Healthcare, but some have lowered their target prices. 

CGS-CIMB’s Ong Kang Chuen maintained his $1.70 target price on the stock, expecting “stronger quarters ahead” due to a further rise in average selling prices (ASP) of rubber gloves. 

UGHC recorded a 2QFY2021 net profit of $32.3 million, 42% higher q-o-q and a jump of 58 times y-o-y. This was ahead of his expectations, which had forecast a $30m net profit for the quarter. 

The stronger profitability was led by continued ASP hikes, which drove topline growth to $88.2 million, up 24% q-o-q and 228% y-o-y, as well as further margin expansion during the quarter. 

He added this is despite near-term logistical disruptions and shipping delays, which caused lower revenue recognition in the quarter, pointing to UGHC’s inventory level rising 70% h-o-h to $57.4 million as of end-1H21.

Get the latest Singapore corporate news stories for FREE

Even with the strong showing, Ong expects ASPs to rise further in coming months, albeit by a smaller quantum given the high base

For more stories about where the money flows, click here for our Capital section

“We estimate ASPs grew by 5% and 8% monthly in Jan and 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,” he said. 

Furthermore, the planned capacity expansion of 500 million additional pieces of gloves per annum is on track to come on stream by Mar 2021, but construction progress of the new factory for additional 1.2 billion pcs per annum capacity has been delayed by Malaysia’s second movement control order (MCO). 

Ong said they estimate a three-month delay, and expect the plant to be fully commissioned by end 1QFY2022, after which UGHC’s total manufacturing capacity will reach 4.6 billion pieces per annum

Leveraging on the industry’s favourable demand-supply dynamics and UGHC’s strengthened balance sheet, standing at net cash balance of  $32.5million as of end-1HFY2021), Ong sees the possibility of further production capacity expansion in 2022.

RHB Group Research’s Singapore Research Group also largely concurred with Ong’s points and maintained their “buy” call, but lowered their target price to 95 cents from $1.37. 

RHB said this was more of a change in valuation methodology to DCF rather then price/earnings ratio (P/E).

It noted the company guided demand for its gloves is still exceeding supply, across the different markets that it operates in. This is consistent with our view that the ASP uptrend should sustain in 2021, due to expected glove deficit of 7.4 billion pieces. 

SEE: UG Healthcare reports record 1H21 earnings of $54.9 mil, surpassing FY20 earnings

They also maintain their FY2021-2023 earnings estimates, assuming ASPs are unchanged.  Their blended ASPs for FY2021-2023 are USD70, USD55 and USD45 respectively.

PhilipCapital’s Head of Research Paul Chew lowered his target price to $1.03 from $1.35, explaining that they continue to value UG at a 30% discount to the Big 4 glove makers. 

“Historically, UG’s discount was around 40%. As industry valuations have corrected to around 10x PE, our target PE for FY22e drops from 14x to 7x. This lowers our TP from S$1.35 to S$1.03.” he said 

Chew is still optimistic about the stock, raising the expected Profit After Tax and Minority Interests (PATMI) for FY2021 by 28% to $107.8 million to account for higher glove selling prices and margins.

As at 11.33 am, shares of UGHC traded at 78 cents, with a FY21 price to book ratio of 3 and a dividend yield of 2.8% from RHB.