SINGAPORE (Sept 4): Maybank Kim Eng Research is maintaining its “sell” call on UG Healthcare Corporation with a 16% lower price target of 21 cents while noting weak cost management and a weaker ability to pass on additional costs.
The new target price – which is based on 12 times FY18E earnings per share (EPS) estimates – represents an estimated 40% discount to its peers’ target price-earnings ratio (PER) of 22 times, which is due to the group’s comparatively smaller size and shorter listing track record.
This comes after the glove manufacturer and distributor’s FY17 earnings missed expectations by 19% on higher-than-expected administration expenses as well as weak contributions from associates.
In a report dated Aug 31, analyst John Cheong explains that the group’s latest set of results were largely impacted by macro factors including higher raw material costs and a gas tariff hike, while start-up costs for its new capacity, including higher depreciation expenses and foreign worker levies, were also recognised.
“The price adjustment is slower for UG as it sells directly to the end customers via its distribution arms, which holds a notable amount of inventory. Management expects to pass on the higher production costs gradually but remains cautious on competition and volatile raw material prices. The weaker associates’ contribution was mainly due to weakness in its US distribution business from higher operating costs,” says Cheong.
Additionally, Maybank has cut its FY18-19E EPS projections for the group by 11-16% to factor in higher expansion costs for the group as its expansion remains on-track to add 0.5 billion gloves per annum, which is set to raise its production capacity to 2.9 billion gloves by end-FY18.
“The new capacity, consisting of three new production lines in a new building will commence production in Mar 2018. Beyond this, the building could accommodate two more production lines, or 0.3 billion of new capacity,” notes the analyst.
As at 3.33pm, shares in UG Healthcare are trading flat at 24 cents.
