UG Healthcare - Navigating Industry Headwinds
- UG Healthcare (SGX:8K7)’s 2HFY22 (1 Jan 2022 to 30 Jun 2022) net profit fell to S$15.5m (-27% h-o-h, -76% y-o-y) from the COVID-19-highs, but remained relatively resilient compared to its Big-4 Malaysian peers, given its differentiated focus and original brand manufacturer (OBM) business model. FY22 net profit was slightly below, making up 93% of our forecasts.
- While its OEM peers are currently suffering from stiff pricing competition led by Chinese peers, UG Healthcare has been able to cushion this impact by focusing on production of gloves with higher margins, while outsourcing the generic nitrile glove products. Management notes that downstream distributors currently hold stronger bargaining power, and its distribution margins remain healthy.
- Given the current oversupply situation in the global glove industry, UG Healthcare does not plan to further expand its glove production capacity beyond the planned addition in the near term. Instead, leveraging on its strong downstream distribution network, UG Healthcare plans to:
- cultivate demand for its range of reusable gloves for users in the heavy industry, and
- seek non-glove investment opportunities in the healthcare related sector as, part of its product portfolio expansion strategy.
- We believe this can be enabled by UG Healthcare’s strong balance sheet — it has S$83.8m net cash on hand as of end-FY22.
- We lower our FY23F earnings per share (EPS) forecast for UG Healthcare by 13.8%, on lower volume assumptions with the delayed commissioning of UG Healthcare’s new production capacity to Oct 2022. Our target price is lowered to S$0.35, now based on 9.6x CY23F P/E (a 40% discount to the glove sector’s historical mean), given the current oversupply situation in the global glove industry.
- Nevertheless, we keep our ADD rating on UG Healthcare as we think its OBM model allows it to fare better vs other OEM glove manufacturers facing pricing pressures amid the current landscape.
- We also think that UG Healthcare’s current valuation is undemanding at 2.5x ex-cash CY23F P/E.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2022-08-29 2022-08-29
Previous report by CGS-CIMB:
2022-05-20 UG Healthcare - OBM Model Bears Fruit
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