RHB Group Research’s Singapore Research team has maintained its “buy” call on UG Healthcare (UGHC), but lowered its target price from 95 cents to 75 cents on a new DCF methodology. 

The team noted that UGHC recorded “satisfactory 1HFY21 results, and that 1HFY2021 core net profit surged 69 times to $54.9 million due to better average selling prices (ASP) and sales volume. 

The company’s cash has increased to $43.9 million as of end-Dec 2020, compared to just $9.3m as of end-Jun 2020. Its total debts have declined to $11.3 million from $35.1 million, and is now in a net cash position of $32.6 million.

SEE:UG Healthcare exceeds expectations in 2Q21, analysts optimistic

In addition, the company plans to add 500 million more pieces of gloves to its annual capacity by the end of next month. As the current capacity is 2.9 billion pieces per annum (ppa), UGHC’s total capacity will be boosted by 17% to 3.4 billion gloves ppa. For FY2022, the company plans to increase its capacity by 1.2 billion ppa to 4.6 billion gloves ppa.

However, the team highlights that moving forward, it expects US$40 to be the long-term ASP for nitrile gloves.  “As the US plans to build its own gloves manufacturing plants, we estimate that the cost of production will be at US$40 ($53.6). This should set the long-term global nitrile gloves price. When the ASP drops below US$40, US producers will stop producing, and in the long term, ASP should revert back to US$40.” they say.

Due to the lower estimated ASP, the team say the blended gloves ASP for UGHC has
been reduced to US$34 from US$45. We assume the long-term volume mix to be 50% for nitrile and 50% for non-nitrile gloves.”We believe the near-term high ASP will encourage more competition in future.” they note.

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The team says that the price for UGHC is still “undervalued” and states that at 60 cents, its share price is currently trading at 3.1x FY2021 P/E. “By using the expected trough earnings per share EPS in FY2023, the stock is trading at 12.6x FY2023 P/E, which is a 19% discount or -1.3SD from its average of 15.5x.”

As at 11:48am, shares of UGHC were trading at 60 cents, with a price to book ratio of 2.3 and dividend yield of 3.6%.