+ Higher selling price drove revenue growth. 1H21 revenue tripled YoY to S$159mn with an estimated 20% growth in volume and 1.5x jump in prices. Sales to China spiked 457% YoY as customers stocked up ahead of winter and the festive season.
+ Gross margins remained robust. 1H21 gross margin was 62%, triple that of 1H20 as glove prices skyrocketed. QoQ, margins expanded from 60.6% in 1Q21 to 63.6% in 2Q21.
+ Record earnings bolstered cash. Cash from operations rose to S$45.9mn. The company now has net cash of S$32.5mn, a major reversal from net debt of S$37mn a year ago. UG announced a special DPS of S$0.00105 and a total payout of S$0.645mn.
– Some lag in deliveries and higher costs. There have been shipment delays. As a result, inventories almost doubled in the past six months to S$57mn. Inventories were predominantly finished goods on transit to Europe. Container constraints are expected to ease only after February. Shipping rates to Europe have catapulted almost 5-fold to around US$10,000 per container. Even then, shipping rates only account for around 2% of UG’s selling prices.
Earnings are still expected to grow QoQ as prices continue to climb in 2021. We also see other growth drivers for UG even if glove prices taper off. Firstly, production capacity will expand by 35% YoY to 4.6bn pieces in FY22e. Secondly, exposure to emerging markets and low penetration rates could provide sources of growth.
Maintain BUY with lower target price of S$1.03, from S$1.35
We 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.
We raise FY21e PATMI by 28% to S$107.8mn to account for the continuous rise in its ASPs and margins. Our FY22e PATMI assumes a 24% YoY contraction in ASPs to around S$80 per 1,000 gloves. We also assume a 15% increase in production costs in FY22e.