OBM model bears fruits
? 2QFY6/22 results in line with expectations. Net profit was flattish qoq as volume recovery offset weakness in ASPs.
? End-demand recovering well; UGHC has stepped up outsourcing efforts as distribution margins improved, with end-market pricing relatively sticky.
? We believe UGHC’s OBM model enables it to fare better than OEM peers, which currently face pricing pressure. Reiterate Add and TP of S$0.42.
2QFY6/22 in line
UGHC reported 2QFY22 net profit of S$10.6m (+0.5% qoq, -67% yoy), in line with our expectations, with 1H22 net profit making up 50% of our FY22 forecast. While ASPs continued to trend downwards, this was successfully offset by higher sales volume during the quarter, helped by the recovery of its manufacturing operations which were previously impacted by Covid-related shutdown and lower mandated workforce capacity.
Further volume recovery in 3QFY22F; OBM model bears fruits
Demand for gloves has improved, driving UGHC’s production capacity utilisation rate back to c.80% levels in Jan (bottleneck being foreign labour shortage). UGHC has further stepped up its outsourcing efforts in 3QFY22 to cater to market demand, as distribution margins have improved with end-market pricing relatively sticky, especially for customers that have smaller order quantities. Given its strong downstream distribution network, we believe UGHC will fare better vs. other OEM glove manufacturers which currently face pricing pressure amid the expanded industry supply – it can choose to outsource more orders of generic SKUs to take advantage of lower ex-factory prices while focusing its production on niche products. For 3QFY22F, we expect higher sales volume to once again offset the impact of declining ASP trend, and forecast flattish qoq earnings.
Plans to grow beyond disposable glove business
UGHC broadened its product portfolio beyond disposable glove products with the introduction of its reusable glove products for heavy industry users in Oct 2021. It is also seeking diversification into non-glove business opportunities in the healthcare-related sector, tapping its entrenched downstream distribution infrastructure and capabilities to broaden its product portfolio.
Reiterate Add
Reiterate Add, with an unchanged TP of S$0.42, based on 11.2x CY23F P/E (a 30% discount to the glove sector’s historical mean). We believe that with UGHC’s significantly expanded production scale and stronger customer base in end-markets, it can achieve much better financial performance compared to pre-Covid levels even as glove pricing fully normalises. Its current valuation is undemanding at 4.6x ex-cash CY23F P/E – its net cash of S$73.1m (as at end-Dec) represents 43% of its market cap. Stronger-than expected demand for gloves is a potential re-rating catalyst. Key downside risk: steeper decline in glove pricing.