Brokers' take: Phillip Securities upgrades UG Healthcare to 'buy'; RHB raises TP

PHILLIP Securities has upgraded its call on UG Healthcare to "buy" from "accumulate" with an unchanged target price of S$0.32, while RHB has raised its target price on the company to S$0.29 from S$0.27 in research reports released on Tuesday (Feb 15).

This comes after the glove manufacturer posted a net profit of S$21.2 million for H1 FY2022, down 61 per cent from the year ago period on the back of a lower average selling price (ASP) and softer production volumes.

Despite this, Phillip Securities analyst Paul Chew believes that glove prices will decline at a slower pace and valuations of the company are turning more attractive.

Chew projects industry glove prices will still fall in Q1 2022 but at a slower pace of around 10 per cent quarter-on-quarter instead of the previously observed 50 per cent from July to September 2021.

He added that a rebound in prices will "remain elusive" because of the huge influx of nitrile capacity - the product used to make certain types of gloves - especially from China.

The analyst said that he also sees value in the share price as UG Healthcare is trading below its book value of 33.8 Singapore cents and 43 per cent of the market capitalisation is net cash.

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He believes the company can fare better than its peers as it is a distributor to end customers and these customers pay more due to their small order quantities. UG Healthcare can also overcome competition by outsourcing more orders to third party factories to take advantage of lower factory prices.

The company is experiencing greater demand for gloves from new industries such as farming and beauty as well. With the global pandemic, health awareness has also risen significantly, giving the company more exposure to emerging market customers.

Meanwhile, RHB has maintained its "neutral" call on UG Healthcare with a higher target price of S$0.29.

The research house said it expects the company to continue to book weaker earnings due to its lower ASP trajectory but projects price erosion to be offset by higher sales volumes, improved economies of scale and an expanded client base.

UG Healthcare's valuation is viewed as fair at a forecasted 11 times price-to-earnings ratio for FY2023, in line with the 5-year mean.

RHB raised expected earnings for FY2022 by 13 per cent and for FY2023 and 24 by 9 per cent after upgrading its projected ASP for FY22 and paring down cost assumptions to reflect the latest raw material price trends.

RHB believes that the original brand manufacturer (OBM) pricing remains resilient and this can soften the impact of the downward ASP pressure on the company.

The brokerage noted that unlike its peers, UG Healthcare benefited from "stickier" OBM prices from Chinese producers who have continuously undercut market prices. It highlighted the company's pricing power and resilient margins quarter-on-quarter. UG Healthcare also managed to secure several contracts with clients paying higher premium prices, RHB added.

Following UG Healthcare's recent launch of reusable gloves for industrial applications, the company has more plans to develop its non-medical segment and RHB has a positive outlook on this venture.

The research team is of the opinion that as UG Healthcare aims to explore niche applications, the company would remain competitive versus its peers.

Shares of UG Healthcare were trading at S$0.265, down 1.9 per cent or S$0.005 as at the midday trading break on Tuesday.