The Company is an established glove manufacturer based in Malaysia for natural and nitrile examination gloves. UG has 2 manufacturing facilities in Seremban Malaysia and a capacity of up to 1.3 billion gloves annually. The Company has established a distribution platform in USA, UK China, Germany and Nigeria and its products are sold in more than 50 countries.
UG has its own brand called "Unigloves" and also OEM for other labels. In additional to gloves, the Company distribute ancillary products like surgical, vinyl and cleanroom gloves.
The revenue and profit for the year has been increasing steadily. I like the fact that the revenue are quite well diversified among the various regions.
The gross margins has been increasing steadily from 14.9% in FY2012 to 20.8% in FY2014. The improvement in margins can be attributed to lower raw material prices, changes in product mix and economies of scale in production.
The Company is listing at an adjusted PER of 8.5x (based on post IPO shares and assuming service agreement is in place) and a price to book of 1.15x. The adjusted NAV post listing is around 18.7c. The market cap based on the IPO price is around $40.4m. Given the revenue is around $49m, the listing is made at around 0.82x revenue.
The Company only intends to pay out at least 20% of its net profit after tax to shareholders from FY2016 onwards. While this is disappointing to some investors, i would say that this is actually the right thing to do given that the purpose of fund raising is to expand the capacity and they can put the cash to better use at this juncture.
Use of Proceeds
It is good to see that the majority of the funds raised will be used to expand production capacity.
The Lee and Ang families will continue to own more than 75% of the Company post IPO. There are only 2 pre-ipo shareholders in Tommie Goh and Jeremy Lee. They came in at around 14.9 cents. Let's see if they can "work" some magic on the stock price post IPO but don't for once think they are going to be long term investors. Only around 18.89% will be freely traded post IPO while the balance will be under moratorium. (Don't even try thinking of shorting the stocks...)
I have done some simple forecast based on the capacity coming onstream and at the same utilization rate and margins. It's done very rudimentary so read it with a pinch of salt.
The peers are trading at much higher valuation, however they are of a much bigger size. Technically, the peers should acquire UG Healthcare as it is accretive to their EPS. Assuming i take a huge discount on the peer valuation and mark the fair value at between 11-14x PE and i use the historical EPS of 2.61 cents for conservatism, the fair value should be around 29 to 37 cents. Implying the stock is of good value even at the IPO price of 21.5 cents.
What I like about the Company
- I like the indirect exposure to the healthcare sector. The sector is likely to continue growing in the foreseeable future where living standards and hygiene levels are increasing. It is a resilient sector where you need healthcare services in good times and bad times and you need protective gloves all the time.
- The Ebola viruses breakout just highlight how vulnerable our world is to diseases and such protective gears are all the more important.
- Gloves manufacturing seemed to have found a natural home in Malaysia given its proximity to raw materials. The low manufacturing cost base in MYR and selling in USD seemed to a great natural advantage. The drop in oil prices should also bode well to lower the production costs of nitrile latex (synthetic rubber).
- UG has clear expansion plan and the first and second phase of expansion is expected to complete by Jan and July 2015. Production will increase to 1.5b and 1.9b gloves annually at the end of each expansion phase. The Company believes it will be able to accept more orders from customers and increasing market demands.
- The Company's revenue and profitability are increasing annually.
Some of my concerns
- Would have preferred the auditors to come from a big 4
- Keen competition from other gloves manufacturers in Malaysia such as Riverstone, Kossan Rubber and Hartalega. Will they try to acquire UG Healthcare or kill it off?
- Weak market sentiments for small caps due to the plunge in prices for oil and gas stocks.
- Will liquidity dry up over time?
- Family run business means making changes to the structure can be more challenging
- It's a small cap stock based on its IPO valuation. That will create some issues for fund managers as they may not be able to invest in ultra small cap stocks due to lack of liquidity. It will need to execute well on its expansion plan before fund managers will take a stake in it.
Mr IPO ratings
Please note that Mr. IPO is vested with 100 lots from the placement tranche and thus the rating is super biased.
I am giving this counter 3 Chillis for this IPO for the following reasons.
- The Company is issuing its IPO at very reasonable valuation. I think it could have easily commanded a better market cap given where the peers are trading. I think IPO flippers should be able to "hit and run"
- The clear expansion in capacity and the listing status will help drive revenue and profits going forward.
- The company attempts to have a public tranche which is highly commendable as they have no need to do that for catalist listing. As such, i will reward it with an extra chilli.
- It is indirectly linked to the healthcare sector. Readers know I had previously blog about Riverstone in my SRS blog and how i exited too early before it ran up spectacularly. Maybe this is a "second chance" for me?
Over the longer term, it will really depend on whether the Company is able to execute its strategy.