UG Healthcare: The rubber gloves manufacturer is up 8.2% today, possibly triggered by an anticipated rise in demand for rubber gloves following the MERS outbreak in South Korea.
Separately, a local broker recently featured the group in an unrated report, highlighting that UG Healthcare is projected to increase its annual production capacity from 1.3b in Jan ’15 to 1.9b by Aug ’15, representing a 46% increase.
The group had outlined plans to convert some of their current production capacity from examination gloves to surgical gloves, by end 2015. This could augur well for the group as surgical gloves typically command higher gross margin of 30% versus 22% for examination gloves.
Management was quick to fan off concerns of execution risks, emphasizing that UG has the necessary expertise and channels to market its surgical gloves, with the group currently distributing third party surgical gloves.
Going forward, UG Healthcare expects demand to come from developing countries, as they seek to improve their sanitary and hygiene standards, and is eyeing export markets in Africa and Brazil.
Separately, a recent CNBC report highlighted that Malaysia’s rubber glove industry could enjoy positive upside from the global healthcare market, given that it accounts for more than 50% of global demand. With the bulk of global sales for rubber gloves denominated in USD, export-oriented glove manufacturers are expected to benefit from the depreciating ringgit against the greenback.
Due to its short listing history, UG Healthcare currently trades at 10.2x FY14 P/E and 1.4x P/B, which is at a significant discount to larger peer Riverstone’s 20.2x trailing P/E and 4.2x P/B. But with its expansion plans and execution ability, the valuation disparity is expected to narrow over time.
Additionally, UG has registered earnings growth in excess of 30% over its past two financial years, and intends to pay out at least 20% of its earnings from FY16 onwards, which translates to a yield of 2% based on historical FY14 earnings.
As such, Market Insight is adding the stock to its growth portfolio with an entry price of $0.265
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