As such, he expects glove demand to remain high in the medium term even with the eventual discovery of a vaccine.
This is given current vaccine manufacturing and distribution constraints hampering mass availability, a structural increase in glove demand given increasing hygiene awareness, and a need to restock inventory across supply chains.
In a September 25 report, Ong estimates a 50x jump y-o-y in the company’s 1Q21 net profit to $15.7 million. Accordingly, he expects “even stronger earnings” in subsequent quarters ahead, and forecasts UGHG to record net profit of $70.5 million (a 400% growth y-o-y) in FY21F.
The growth, Ong explains, is likely to be driven by a further increase in ASP, higher sales volume, and higher economies of scale.
“We estimate ASPs could rise by 10-15% monthly between Sep to Nov 2020, versus 10-12% monthly from May to Aug. We understand the recent hike in nitrile glove (around 40% of FY20 revenue contribution) prices was catalysed by raw material shortages,” he says.
“Meanwhile, latex glove (around 50% revenue contribution) prices are also on the rise as more end-users from developed countries are increasingly open to switching from nitrile to latex gloves given the long order lead time for nitrile. We forecast UGHC to record ASP growth of +69% yoy in FY21F,” he adds.
Ong has thus maintained his “add” or “buy” call on the counter with an unchanged target price of $4.80.
“UGHC remains our preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation (a 52% discount to the Malaysia-listed glove sector average CY21F P/E of 16.7x) and OBM business model, which allows it to garner stronger ASP upside potential vs. its peers,” Ong says.
“Potential re-rating catalysts include higher-than-expected increase in selling prices; downside risks include earlier-than-expected widespread availability of a vaccine for Covid-19,” he adds.
As at 12.43pm, shares of UGHC were trading at $2.61, with a FY21 price-to-book ratio of 3.83 and dividend yield of 1.37%.
