Analysts are still upbeat on UG Healthcare despite glove prices normalising.
Analysts are positive on UG Healthcare Corp following its latest 3QFY2022 ended March results.
However, the group experienced a 68.9% y-o-y drop in earnings to $10.7 million and a 31.2% y-o-y decline in revenue to $64.3 million.
The lower figures were due to the declining average selling prices (ASPs) of gloves. The fall in ASPs were due to the increased market supply of disposable examination gloves and higher competition among disposable gloves manufacturers.
According to the group, the impact was mitigated by its own-brand manufacturing (OBM) model, as it produced higher volume on its own at 3.4 billion pieces of gloves per year.
“The ramp up of our productivity in the second quarter (October to December 2021) following the temporary closure and 60% manpower capacity in the first quarter (July – September 2021), allowed us to record higher revenue sequentially in 3QFY22,” says Lee Jun Yih, executive director and finance director of UG Healthcare.
However, the group is aware and mindful of current manpower shortage issues that could affect production.
Despite the lacklustre 3QFY2022 results, CGS-CIMB Research is keeping its “add” call with a target price of 42 cents.
According to analyst Ong Khang Chuen, the group’s OBM business model is bearing fruit, as the group has been to navigate challenges in the glove manufacturing industry, where ASPs have been on a decline for the past year due to intensified competition resulting from higher industry supply.
For the past three consecutive quarters, UG Healthcare has achieved stable net profit of about $10 million, while peers’ have been showing sequential declines. Instead of competing directly on pricing, the group has been focusing on production of gloves with higher margins, such as niche/premium nitrile gloves and latex gloves, while outsourcing generic nitrile glove products (which is seeing stronger price competition) from other manufacturers.
The management has also noted that with free on board (FOB) pricing falling to about US$22-23 per carton, distribution margins are still stronger than pre-pandemic levels.
Meanwhile, UG Healthcare’s new capacity will be commissioned gradually from May onwards. But labour shortage may be a constraint on the pace of production ramp, hence Ong has cut FY2022 EPS forecast by 7.1% on lower volume assumption.
“Nevertheless, we continue to believe that with a significantly expanded production scale and strengthened customer base in end-markets, UG Healthcare can achieve much stronger financial performance compared to pre-Covid levels even as glove pricing fully normalises in the upcoming quarters,” adds Ong.
On the other hand, PhillipCapital too is reiterating its “buy” recommendation on UG Healthcare with a target price of 32 cents.
On a q-o-q basis, analyst Paul Chew noticed that gross margins are starting to stabilise after a euphoric 58% in FY2021. “We expect gross margins to stabilise around current levels due to improving latex and distribution margins,” he says.
On the outlook, Chew notes that Chinese manufacturers continue to disrupt generic nitrile glove prices. Their short lead times and aggressive pricing (US$18-19), suggest excess capacity or inventory available from Chinese manufacturers.
With this, he expects the group to look to outsource their nitrile customer orders from these lower-cost factories. The low prices will allow the distribution business to enjoy attractive margins. UG Healthcare has built up a distribution network, namely in Europe, for nitrile gloves. The new plant will raise the production capacity of latex gloves and support earnings in FY2023 and according to Chew, the major challenge in FY2023 will be cost pressures from higher minimum wages (effective May 1) and the increase in gas tariffs.
“After four quarters of falling glove prices, we believe stability has started to creep in. UGHC's new capacity, flexibility to outsource and strong branding and distribution network in emerging markets will allow the company to stabilise earnings,” says Chew.
However, Chew is remaining cautious on the group’s labour issues, which the group’s ability to ramp up production will highly depend on.
As at 1.00pm, shares in UG Healthcare are trading at 22 cents, or 3.4x FY2022 earnings with a dividend yield of 2.3%, according to PhillipCapital’s estimates.
Photo: UG Healthcare