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Does UG Healthcare Corporation Ltd Make a Good Investment?

UG Healthcare Corporation Ltd (SGX:41A) is one of the lesser-known glove manufacturers listed in Singapore. With a market cap of just S$42.1 million, it is less than one hundredth the size of its biggest competitor, Top Glove Corporation Berhad (SGX: BVA).

Despite its small size, UG Healthcare posted some eye-popping results in its latest financial year, which ended on 30 June 2018. Net profit surged 77.4% to S$4.3 million, on the back of a 19.7% jump in revenue.

That said, recent performance is not the only factor to consider when investing. Here are some reasons for and against investing in UG Healthcare.

The bright side

As mentioned earlier, the group made significant strides in its latest fiscal year as net profit surged on the back of its stronger sales. On top of that, lower raw material prices had resulted in significant gross profit margin expansion. Favourable currency exchange rates also led to foreign exchange gains, which helped to bump up profits for the year.

In addition, during the financial year, the group completed construction of a new production facility. The facility has commenced partial commercialisation of Phase 1, which will add 500 million gloves per annum to its capacity. It is also planning to add 300 million gloves per annum to its capacity under Phase 2, bringing its total capacity glove capacity to 3.2 billion gloves per annum.

Valuation-wise, UG Healthcare also trades at a discount to its peers. At a share price of S$0.22, its shares have a price-to-earnings multiple of 9.7, below both Top Glove Corporation Berhad and Riverstone Holdings Limited (SGX: AP4).

The not-so-bright side

Despite its growth, there are potential pitfalls that could hinder the company in the future. For one, foreign exchange gain was a large part of its net profit growth. Excluding the foreign exchange gain, profit before tax would have been almost flat.

Also, the group has borrowings totalling S$26.8 million, with just S$6.7 million in cash, putting in a net debt position. Also, S$21.4 million of the debt is due in one year or less. The group will need to refinance its debt this year, and might incur higher interest expenses going forward.

Despite the spike in operating profits, cash flow from operations remained negative in the latest year. With the group continuing to invest in new production facilities, free cash flow for the company was a negative S$5.1 million.

The industry also remains highly competitive, with much larger players in the market. Glove manufacturers are susceptible to fluctuations in raw material prices and competition can also force smaller companies to lower their average selling prices, resulting in lower gross margins. With limited economies of scale, smaller players are at a disadvantage over their larger peers.

Not to mention, the ongoing trade war might not only impact sales for UG Healthcare going forward but could also affect raw material prices and cause currencies to fluctuate.

The Foolish bottom line

The headline numbers certainly look good for UG Healthcare. However, on closer inspection, most of its earnings growth was from favourable currency fluctuations. Even though it is expanding its capacity, there are certainly challenges the company has to face, such keen competition. In addition, the group continues to be cash flow negative from its operations and has quite a large chunk of its debt due within the next year. With all these things in mind, I think investors should stick to the sidelines to see how things unfold.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Riverstone Holdings Limited and Top Glove Corporation Berhad. Motley Fool Singapore contributor Jeremy Chia owns shares in Riverstone Holdings Limited.