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Concerns over lower ASPs largely priced in

■   1QFY6/22 results were below expectations, due to: 1) weaker volumes, given production disruptions, and 2) lower ASPs.
■   End-demand seeing signs of recovery; UGHC has stepped up outsourcing efforts as distribution margins set to improve with ex-factory prices stabilising.
■   Reiterate Add, with a lower TP of S$0.42, based on 11.2x CY23F P/E.

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1QFY6/22 below expectations
UG Healthcare Corp (UGHC) announced a 1QFY22 net profit of S$10.6m (-64% qoq, -53% yoy), below expectations at 14% of our previous FY22F. The weaker profitability of the quarter was mainly due to: 1) volume impact, as UGHC’s upstream manufacturing operations were impacted by three weeks of temporary closure, followed by lower workforce capacity in the quarter, and 2) faster-than-expected downward adjustments in ASPs, given customers’ preference to hold lower inventory, in view of the lower urgency for stockpiling and uncertainties in their local business environment.

Signs of stabilisation
UGHC notes that demand for gloves has seen signs of improvement in Nov/Dec, with some customers resuming orders given the recent resurgence in Covid-19 cases. UGHC has stepped up its outsourcing efforts in 2QFY22F to cater to market demand, as distribution margins are set to improve with ex-factory prices stabilising. We continue to believe that UGHC’s ASPs can be more resilient vs. OEM peers, given its: 1) diverse product mix (latex gloves, 43.5% of UGHC’s FY21 revenue, are seeing less pricing competition vs. nitrile gloves currently), and 2) strong downstream distribution network, especially in emerging markets (Africa, South America), where international peers are less entrenched.

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Returning to optimal production capacity
UGHG’s manufacturing facility has seen progressive recovery in utilisation rates towards optimal efficiency in 2QFY22F, with the resumption of a 100% workforce capacity. Given delays due to the MCO in Malaysia, the capacity expansion of 1.2bn pcs/annum is expected to be completed by Mar 2022. Management remains optimistic that the increased output from its manufacturing level can be well absorbed by its downstream distribution capabilities.

Reiterate Add
We cut our FY22-24F EPS by 32%-42% to account for lower ASP assumptions; our TP is lowered to S$0.42, still based on 11.2x CY23F P/E (a 30% discount to the glove sector’s historical mean). Valuation is undemanding at 5.5x CY22F P/E, supported by net cash of S$53.2m as of end-FY21 (40% of market cap). Re-rating catalysts: stronger-than-expected demand for gloves; downside risks: steeper glove pricing decline.