UG Healthcare Corporation Ltd – One quarter already beat one year November 9, 2020 214

PSR Recommendation: BUY Status: Maintained
Target Price: S$1.35
  • 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.

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About the author

Profile photo of Paul Chew

Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has almost 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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