Excerpts from analyst's report

Maybank Kim Eng analyst: John Cheong

Undervalued glove maker; Initiate BUY 

UGHealthcare6.15UG Healthcare operates two manufacturing plants in Seremban, Malaysia, capable of producing up to 1.3 billion gloves per annum. Photo: Company» Major capacity expansion of 27%/32% in FY16/17 to meet strong demand and post-IPO transition to lift EPS by 38%/45%. 

» Positive industry trends plus ample room for expansion by UG to support future growth. 

» Own brand and strong distribution network differentiate it from peers. UG trades at 55% discount to peers, despite a comparable growth profile. An under-researched name. BUY 

Major expansion & absence of IPO costs to boost EPS
UG increased its capacity to 1.9b gloves pa in FY16, from 1.3b in FY14. This represents 46% more capacity and is UG’s largest expansion; 0.2b of the new capacity commenced production in Feb 15, while the remaining 0.4b started in Oct 15. This will enable UG to meet customers’ overwhelming demand, which it has substituted with OEM products in the past.

In addition, FY15 earnings were hit by post-IPO and one-off marketing costs. From a lower base, we expect FY16/17 EPS to grow by 38%/45% YoY. Beyond phase 2, there is still room for three more production lines in the existing factory and four additional lines on a neighbouring site. This could potentially lift capacity by another 1.5b/79% gloves pa. The three new lines should start contributing in FY17F.

Positive industry trends
The glove industry is resilient with strong growth potential from improved healthcare standards. Also, we expect UG to benefit from the strengthening USD against MYR and subdue raw material prices.

A differentiated glove maker; BUY with 34% upside
Unlike most of its peers that emphasise on OEMs, UG sells its own “Unigloves” brand and it operates an established distribution platform that sells to over 50 countries.

Our TP of SGD0.41 is based 14x FY16 PER, a 30% discount to our peer average target of 20x, to account for smaller size and shorter listing track record. UG is trading at 55% discount vs peers, despite having a comparable growth profile and unique business model. Key risks: oversupply of healthcare gloves, forex and raw material prices.

Full report here.

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