Can this small glove producer overcome its lack of scale?

“UGH does not have the scale like its other listed peers,” says Phillip’s head of research Paul Chew in an unrated report on Friday.

UGH is trading at an FY17 price-to-earnings ratio of 15.7 times and price-to-book ratio of 1.0 times, compared to its peers’ average of 29.7 times and 5.3 times, respectively.

However, it offers an EBITDA margin of just 3.3% and ROE of 6.5%, compared to its peers’ average of 18.8% and 18.2%, respectively.

“To compete more effectively, the longer-term strategy is to build up brands and to create its own distribution network,” Chew says, following a site visit to UGH’s plant in Seremban, Malaysia.

“This provides UGH a channel for their products and to enjoy incremental margins at the distribution level,” he adds.

With the smallest capacity among its listed peers, Chew opines that UGH has much more room to grow.

“Rather than competing on volume, UGH strategy is low volume and high mix products where margin will be better,” Chew says.

UGH has a glove capacity of 2.4 billion pieces. In comparison, Riverstone has a capacity of 6.2 billion, while Top Glove has a capacity of 49.1 billion.

However, Chew notes during the site visit that UGH has a new building under construction. Phase 1 of the new facility is expected to add 500 million gloves to its capacity by 1Q18, while Phase 2 will add a further 300 million pieces.

In addition, Chew says that UGH appears to be making good headway into Brazil, where it is one of only eight importers of gloves into the country.

“Brazil is a rather protected market with many more rules and restrictions,” Chew says. “Gloves in Brazil for medical use need to be barcoded.”

“Brazil accounts for almost 20% of its sales from virtually nothing a few years ago,” he adds.

As at 12.14pm, shares in UG Healthcare are trading flat at 20 cents.