Excerpts from Lim & Tan Securities' report
UG Healthcare operates two manufacturing plants in Seremban, Malaysia, capable of producing up to 1.3 billion gloves per annum. Photo: Company
UG Healthcare’s ($0.25, unchanged) production plans remain on track. As we had previously reported, the company’s maximum production capacity of rubber gloves increased from 1.3bln in Jan-15 to 1.5bln currently.
Going forward, it is slated to increase its annual production capacity to 1.9bln by Aug-15, representing a 46% increase from last year. For FY ending June’15, while we are expecting the company to register an operating profit that would be flat yoy (due to the lack of new production on capacity), we are nevertheless expecting net profit to experience a decline due to IPO expenses (of approximately $1mln) that would be recorded in 2H ending June’15.
During our visit to the company’s production factories in Malaysia last week, management updated on their plans to convert some of their current production capacity from examination gloves to surgical gloves.
Management is looking to execute this in 1H ending Dec’15, and they estimate that they would be able to register sales of their new product in 3Q ending Mar16. While management had cautioned that one of its production lines would be down for around 45 days and would not be able to produce any gloves during this conversion exercise, we believe that this trade-off is worthwhile as surgical gloves typically command higher gross margins as compared to examination gloves (~30% vs ~22%).
Replying to queries on whether there would there be execution risks given that this is the company’s initial foray into manufacturing surgical gloves, management allayed such fears and highlighted that the methodology used in producing such gloves is not too different from manufacturing their current examination gloves. Furthermore, management noted that the company has the experience and available channels in selling surgical gloves as they are presently engaged in the distribution of surgical gloves of other brand manufacturers.
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On the often-asked query on whether the entire rubber glove industry is facing an oversupply, management commented that they believe some of the developing countries are vast markets waiting to be tapped.
As these third-world nations experience economic growth and thus seek to improve their sanitary and hygiene standards, the company could therefore export more rubber gloves to countries like Brazil and Africa. Management added that trade receivables risk in some of these developing nations are not as high as it would seem as UG Healthcare already has a foothold in places such as Brazil and Africa through their current distribution channels.
Given UG Healthcare’s short listing track record and smaller size compared to its bigger Singapore listed peer, its valuation continues to be at a meaningful discount, currently trading at 8.1x PE and 1.3x P/B compared to Riverstone’s 18.1x and 3.7x respectively. Good execution on its expansion plans, a steady delivery of good performance and dividends going forward will potentially see its valuation gap close with that of Riverstone.
