Navigating industry headwinds
- 2HFY6/22 net profit (-76% yoy) was slightly below expectations but relatively resilient vs. the big 4 Malaysian glovemakers’ c.90% yoy net profit decline.
- UGHC’s OBM model helps it cushion pricing pressures — it can focus on producing higher margin niche products, while outsourcing generic gloves.
- Reiterate Add; valuation undemanding at 2.5x ex-cash P/E. Strong balance sheet enables UGHC to explore diversification beyond disposable gloves.
2HFY6/22: OBM model bears fruit
UG Healthcare Corp’s (UGHC) 2HFY6/22 net profit fell to S$15.5m (-27% hoh, -76% yoy) from the Covid-19-highs, but remained relatively resilient compared to its Big-4 Malaysian peers (net profits down by more than 90% yoy in 2QCY22), given its differentiated focus and original brand manufacturer (OBM) business model. FY22 net profit was slightly below, making up 93% of our forecasts, mainly due to higher-than-expected operating expenses. UGHC proposed a total FY22 DPS of 0.64Scts/share, implying a 3% dividend yield.
Navigating the glove oversupply situation well
While its OEM peers are currently suffering from stiff pricing competition led by Chinese peers, UGHC has been able to cushion this impact by focusing on production of gloves with higher margins (i.e. niche/premium nitrile gloves, latex gloves), while outsourcing the generic nitrile glove products (which is seeing stronger price competition from other manufacturers). Management notes that downstream distributors currently hold stronger bargaining power, and its distribution margins remain healthy.
Looking to diversify beyond disposable gloves
Given the current oversupply situation in the global glove industry (particularly in upstream manufacturing), UGHC does not plan to further expand its glove production capacity beyond the planned addition (delayed till Oct 2022 given labour shortage) in the near term. Instead, leveraging on its strong downstream distribution network, UGHC plans to: 1) cultivate demand for its range of reusable gloves for users in the heavy industry, and 2) 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 UGHC’s strong balance sheet — it has S$83.8m net cash on hand as of end-FY22.
Trading at 2.5x ex-cash P/E; reiterate Add
We lower our FY23F EPS by 13.8%, on lower volume assumptions with the delayed commissioning of UGHC’s new production capacity to Oct 2022. Our TP is lowered to S$0.35, now based on 9.6x CY23F P/E (a 40% discount to the glove sector’s historical mean), from 11.2x previously, given the current oversupply situation in the global glove industry. Nevertheless, we keep our Add rating on UGHC 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 UGHC’s current valuation is undemanding at 2.5x ex-cash CY23F P/E. Potential re-rating catalysts include earnings-accretive M&As or stabilisation in industry pricing; downside risks include further ASP weakness.
