Brokers' Call: UG Healthcare


Broker: Maybank Kim Eng

Call: Sell

Target Price: 21 Singapore cents

For UG Healthcare, earnings for the financial year 2017 missed estimates by 19 per cent due to higher-than-expected administration expenses and weak contributions from associates.

Revenue grew 11 per cent year on year, driven by a 26 per cent capacity increase to 2.4 billion gloves per annum. Earnings fell 55 per cent year on year due to a lower gross margin, forex losses and weaker associate contributions. The gross margin fell 7 percentage points to 15 per cent due to a significant increase in average raw material prices, gas tariff hike, higher depreciation charge for new production lines and a levy on foreign workers. UG was unable to pass on the spike in raw material costs.

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.

UG's expansion remains on track to add 0.5 billion gloves per annum, which will raise its capacity by 16 per cent to 2.9 billion gloves by the end of financial year 2018.

The new capacity, consisting of three new production lines in a new building, will commence production in March next year. Beyond this, the building could accommodate two more production lines.


Broker: DBS Group Research

Call: Hold

Target Price: $3.52

Through its subsidiary, Wilmar acquired a 50 per cent equity stake in Aalst Chocolate, a Singapore-based manufacturer of premium chocolate, via purchase of shares from existing shareholders and subscription of new shares.

The remaining 50 per cent stake will be held by Aalst Chocolate's chief executive officer and founder Richard Lee, and co-founder and managing director Connie Kwan.

Aalst Chocolate is understood to be the only Singapore brand that can produce both chocolate covertures and compounds, and currently exports over 98 per cent of its products, supplying to customers mainly in industrial sectors (confectionery, ice-cream, biscuits and bakery) and food service sector (to professionals and chefs) in more than 45 countries globally.

It owns five brands. Financial details are scarce. The purchase of shares came from existing shareholders. The transaction is believed to be funded internally, given the strength of Wilmar's balance sheet.

According to Wilmar and Aalst Chocolate, the joint venture allows both companies to further the existing supplier-customer relationship. Aalst Chocolate will be able to leverage on Wilmar's vast manufacturing and distribution network in Asia and penetrate further into China.

The joint venture will help to deepen Wilmar's foothold in the downstream consumer products, on top of its existing consumer products businesses. There may be further plans to invest in manufacturing plants in China, for instance.

A version of this article appeared in the print edition of The Straits Times on September 11, 2017, with the headline 'Brokers' Call'. Print Edition | Subscribe