+ Stronger balance sheet. Net cash in 1H21 was S$73.1mn (1H20: $32.5mn), boosted by free cash-flows of S$21.5mn. Net cash represents 43% of the market capitalisation.
– Further delay in new capacity. The new 1.2bn glove factory in Seremban will be delayed from March 2022 to May 2022. Construction work stopped from June to August due to lockdowns and labour shortages. It only resumed in mid-September. Meanwhile, the focus for the company will be on glove branding efforts and sourcing of new factory workers.
Glove prices especially for nitrile are still declining but at a slower pace. Chinese manufacturers remain the largest price disrupter in the industry prompting Malaysian peers to either match or come closer to the lower prices. The ample capacity in China is reflected by their short delivery times to meet customer orders.
UGHC can fare better than peers despite lower prices by: (i) Outsourcing more customer orders to third party factories to take advantage of these lower factory prices; (ii) UGHC enjoys higher prices as a distributor to end customers. Such end customers pay a premium due to the smaller order quantities of cartons or pellets; (iii) UGHC is experiencing glove demand from new industries such as farming and beauty; and (iv) Emerging market customers are upgrading their quality standards as health awareness has risen significantly due to the pandemic. UGHC’s exposure to emerging markets and latex gloves such as Brazil, China and Nigeria is around 45% of sales.
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We find valuations of the company turning more attractive and the pace of decline in glove prices tapering off.