UG Healthcare (“UG”) recently caught my attention. It has tumbled approximately 20% from an intraday high of around $1.15 on 7 Aug 2020 to close $0.915 on 26 Oct 2020. The doji formation on 26 Oct 20 on good volume may be an early indication that selling may abate in the near term.
The recent weakness in UG’s share price is likely attributed to profit taking in the share prices of its Malaysia listed peers and occasional news on the development of vaccines which may result in demand for gloves and consequently their average selling price (“ASP”) falling off the cliff.
I have outlined six interesting aspects of UG which caught my attention.
1. Average analyst target $1.49; implies 63% potential upside
Based on Figure 1 below, two analysts cover UG with target prices ranging $1.38 – 1.60. Average analyst target is at $1.49, implying a hefty 63% potential capital upside (if the analysts are correct). Readers can refer to the website HERE for UG’s analyst reports.
Figure 1: Average analyst target $1.49; potential capital upside of around 63%
Source: Bloomberg 26 Oct 20
2. AGM, dividend, and results in the near term
UG has a few events in the near term. Firstly, it is hosting its AGM on 30 Oct 20, 10am. Secondly, UG plans to release its 1QFY21F voluntary business update on 5 Nov 2020, after market close. This should shed more light in its business performance. Last, but not least, it is going to ex-div S$0.00238 / share on 9 Nov 20.
3. Chart seems to be on the verge of a bullish reversal
Based on Chart 1 below, although UG has fallen four out of the past five trading days with short term exponential moving averages (“EMAs”) trending lower, coupled with some indicators such as MACD turning lower, there are some encouraging signs from the chart. For example,
a) Medium and long term EMAs are still trending higher with a good degree of separation. This may mean that medium and long term investors have not become sellers of this stock;
b) A doji has formed on 26 Oct. This usually indicates a potential reversal pattern. The accuracy of this pattern increases as UG bounces off the resistance turned support levels of around $0.875 – 0.885 on meaningful volume.
Thus, it is likely that the recent selling in UG may abate in the near term.
Near term supports: $0.910 – 0.915 / 0.875 – 0.885 / 0.865
Near term resistances: $0.940 / 0.980 / 1.00 / 1.03 – 1.04 / 1.08
Chart 1: Formation of a doji may indicate a potential reversal pattern
Source: InvestingNote 26 Oct 20
4. CGS-CIMB estimates UG to post a whopping 50x increase in profit in 1QFY21F
Based on a CGS-CIMB Research report dated 25 Sep 2020, the analyst believes that UG may post a net profit of S$15.7m in 1QFY21F (an approximate 50x increase in profit y/y). Moreover, he also estimates that UG may clock in net profit for FY21F and FY22F (financial year ends in June) of around S$70m and S$59m respectively. At $0.915, this translates to approximately 8.0x FY21F PE and 9.5x FY22F PE. Hence average FY21-22F PE is around 8.8x PE. This is significantly lower than its peers which are easily trading around 14x average FY21-22F PE.
5. Demand is still in favour of glove makers
Demand continues to be strong corroborated by industry statistics and commentary from gloves’ management as per below:
a) According to US-based Allied Market Research, they estimate that the global disposable gloves market may soar almost 3x from US$6.8b in 2019 to US$18.8 b by 2027;
b) Based on CGS-CIMB Research report dated 20 Oct 2020, CGS-CIMB analyst wrote that Supermax’s management has indicated strong order visibility up to end CY2021.
c) Based on an article on CNA dated 4 Sep 2020, Top Glove mentioned that demand continues to be strong with order backlog stretching to nearly 600 days, compared with a normal delivery time of 30 to 40 days.
6. Expansion on track
Based on its annual report FY2020, UG believes that it is timely for them to expand their production capacity more aggressively to narrow the gap between their upstream manufacturing supply and downstream distribution market demand. The Group has commenced their capacity expansion plans through
a) An increase of 500m pieces of gloves in their extended production facility at one of their two existing manufacturing facilities, to bring their total installed production capacity to 3.4b pieces of gloves per annum by end March 2021, and
b) The recent acquisition of a new piece of land which is in close proximity to their existing manufacturing facilities to facilitate the construction of a new production facility for a production capacity of 1.2b pieces, with the aim of bringing their total installed production capacity to 4.6b pieces of gloves per annum by end June 2021.
Almost all investments carry risks. I have listed some noteworthy risks but do note that it is not an exhaustive list of risks.
As the glove industry continues to enjoy supernormal profits, it is reasonable to assume that competition is likely to intensify either via incumbents increasing their capacities at a faster pace, or new entrants coming into the industry. Competition may erode UG’s margins; reduces its ability to hike ASP and reduces its market share.
2. Usual business risks
The usual business risks such as forex risks (stronger ringgit vs USD); volatile raw material prices; hiccups in their expansion plans; changes in government polices etc may affect UG’s results and operating performance.
3. Performance of Malaysia listed glove makers may also affect UG’s share price
Recently, Malaysia glove makers have seen some profit taking. Based on observation, weakness in the Malaysia listed glove makers typically will also negatively affect the share prices for our Singapore listed glove makers. Personally, I do not know whether the Malaysia glove makers will continue to drop. However, given that the Malaysia listed glove makers are going to report results in the next few weeks, it is likely that the recent decline may be temporary. Based on various analyst reports, an indicative results timeline is 23-Oct (Careplus); 27-Oct (Hartalega); 30 Oct (Supermax); 13-Nov (Sri Trang Gloves), 19-Nov (Kossan). Top Glove’s 1Q FY21 will be released sometime early Dec.
4. Vaccine may affect both sentiment and eventually demand for gloves
The discovery of a successful vaccine may affect the glove makers (not necessarily only UG) in at least two ways.
a) Sentiment on glove makers will likely weaken, as funds are likely to flow to industries which benefit from a decline in Covid 19 cases;
b) If there is a successful vaccine, it is likely that countries or companies may not need to stockpile excessive glove inventory.
Personally, in view of the above points, I believe a case may be made in accumulating UG’s shares especially ahead of its results. Nevertheless, there are risks to be considered such as the above mentioned risks, couple with U.S. election event risk etc. Readers should be cognisant of the pros and cons in owning UG shares and should exercise due diligence and independent judgement.
P.S: I have previously informed my clients on UG, especially yesterday. I am vested. Readers please visit UG’s website HERE and do your own due diligence. Investments carry risk and its best to be familiar and comfortable in what you invest in.
Please refer to the disclaimer HERE