With a market capitalisation of under S$50 million, UG Healthcare Corporation Ltd (SGX: 41A) is one of the smaller glove manufacturers listed in Singapore. In its last full financial year, which ended on 30 June 2018, the company posted some eye-popping results as revenue and net profit surged 19.7% and 77.4%, respectively.
However, as suggested by its most recent earnings update, these numbers are difficult to sustain. On Wednesday, the company reported that despite a 13.3% uptick in revenue, net profit fell 30.7% in the first half of its financial year.
Here are the three most important takeaways from the company’s earnings release.
No. 1: Higher marketing expenses squeezed margins
Unlike most other glove manufacturing companies, UG Healthcare has its own downstream distribution business and sells its disposable gloves under its proprietary “Unigloves” brand. The company is investing heavily in marketing to strengthen its brand and expand its distribution network.
In the reporting six months from July to December 2018, marketing and distribution expenses increased by 51.6%. Consequently, net profit margins were narrowed, which resulted in the lower profit so far this financial year.
While there are clearly risks to having its own downstream business and selling directly to end users, if its brand gains traction, UG Healthcare can benefit from higher margins compared to selling through a secondary distributor.
No. 2: Production expansion hiccups
UG Healthcare has expanded its production capacity to meet the growing demand for rubber gloves. Phase 1 of its production capacity expansion, which will add 500 million in annual production capacity, has gone into full commercialisation in January 2019. In the previous quarters, there was only partial commercialisation due to the fine-tuning of the new product lines.
The group also scheduled maintenance for two of its existing production lines, which lowered its utilisation rate in the last quarter. These hiccups affected revenue growth so far this year.
Lee Jun Yih, Executive Director of UG Healthcare, said:
“We believe that overall utilisation rate of our production capacity will normalise over next few quarters as the new production lines stabilise and complement the production schedules of the existing lines.”
No. 3: Looking ahead
With the full commercialistion of phase 1 expansion, investors can expect a revenue uptick in the next quarter. The group is also contemplating whether to increase the production capacity by another 300 million pieces, which could bring the group’s total capacity up to 3.2 billion gloves per annum.
However, management said it will continue to drive marketing campaigns to promote its “Unigloves” brand through its distribution network. As such, investors should brace themselves for higher marketing costs that could continue to squeeze net margins down the road.
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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 contributor Jeremy Chia does not own shares in any company mentioned.