+ More QoQ stability in margins. Gross margins have started to stabilise after a euphoric 58% in FY21. We expect gross margins to stabilise around current levels due to improving latex and distribution margins.
– Ramp up of new capacity dependent on labour availability. The new glove factory will raise production capacity by another 1.2bn pieces to 4.6bn. The plant is expected to be completed in May 2022 with production commencing in June. The ability to ramp up production will depend on the arrival of foreign workers. Many industries are queuing up to secure these workers.
Chinese manufacturers continue to disrupt generic nitrile glove prices. Their short lead times and aggressive pricing (US$18-19), suggest excess capacity or inventory available from Chinese manufacturers. UGHC will look to outsource their nitrile customer orders from these lower-cost factories. The low prices will allow the distribution business to enjoy attractive margins. UGHC has built up a distribution network, namely in Europe, for nitrile gloves. The new plant will raise the production capacity of latex gloves and support earnings in FY23e. The major challenge in FY23e will be cost pressures from higher minimum wages (effective 1st May) and the increase in gas tariffs.
Maintain BUY with an unchanged target price of S$0.32
After four quarters of falling glove prices, we believe stability has started to creep in. UGHC’s new capacity, flexibility to outsource and strong branding and distribution network in emerging markets will allow the company to stabilise earnings.