• 1Q21 revenue and earnings beat our forecasts by more than 40%. Higher selling prices bumped up revenue and margins. Quarter’s PATMI of S$22.7mn already higher than FY20.
• Revenue surged 170% YoY to S$71mn: Europe +182% YoY, South America +237%.
• Gross margins were a record 70%, higher than our forecast 43%.
• We raise FY21e PATMI by 55% to S$84.3mn for higher ASPs, revenue and gross margins. TP is flat at S$1.35 vs S$1.33 previously, as we use more normalised earnings in FY22e as our basis. TP is now pegged at 14x PE, a 30% discount to larger glove peers vs 40% discount earlier. We believe this is warranted by an improved balance sheet, profitability, track record and expansion plans.

Positives

+ Higher ASPs propelled revenue. 1Q21 revenue increased 170% YoY to S$71mn. Volume growth was in the high teens. Higher selling prices was the main reason for the surge in revenue. Countries with the highest growth were Europe (Germany/UK), South America (Brazil) and Asia (China).

+ Blockbuster margins. Gross margin was a record 70%. Higher selling prices were behind this. The price of nitrile input is rising but rising glove prices should be able to offset this. Raw materials are around 45% of production costs and 13% of sales. Even a 10% rise in nitrile prices will only shave 1.3% off gross margins, in our estimation. UGHC’s current 8-10% MoM hikes in ASPs should overwhelm increases in material costs.

+ Net cash. With better operating profits and cash flows plus net placement* proceeds of S$18.4mn, UGHC had net cash of S$3mn (Jun 2020: S$25.8m net debt).

*On 21 August 2020, UGHC completed the placement of 7.5mn new shares at S$2.545 per share. On 31 August 2020, UGHC announced a share split of 1 existing ordinary share into 3 ordinary shares.

Negative

– Higher effective tax and other costs. Effective tax in 1Q21 was 28%, up from last year’s 15% and our 18% assumption. The jump was due to under-provisions in prior years. The other exceptional rise in expenses was a combined S$2.5mn for additional staff bonuses and forex losses.

Outlook

Visibility for FY22e is limited. Our FY22e forecasts conservatively factor in a steep 24% decline in ASPs and 26% point fall in gross margins. Growth is expected to be supported by a 52% jump in effective capacity. Near term, we expect 2Q21e earnings to rise QoQ as glove selling prices are still rising.

Production capacity will be expanded in two phases:

• Phase 1: addition of 500mn pieces of gloves by end-Mar 2021 to 3.4bn pieces at a capex of RM20mn.
• Phase 2: addition of 1.2bn pieces of gloves by end-Jun 2021 to 4.6bn pieces at a capex of RM60-65mn. This includes newly-acquired land close to UGHC’s existing facilities.

Maintain BUY with higher TP of S$1.35, from S$1.33

Our TP used to be based on a 40% discount to the big 4 glove makers. We are narrowing this discount to 30%, given its improved balance sheet, profitability, track record and expansion plans. At a 30% discount to the Big 4, PE is 14x. We derive a TP of S$1.35.

Given uncertainties surrounding the sustainability of its record margins and selling prices when the pandemic winds down, we value UGHC on more normalised earnings in FY22e. We already incorporate a 24% decline in ASPs and 25% point drop in GP margins. Volume growth is expected to be its major earnings driver that year.