Riverstone Holdings - CGS-CIMB Research 2020-05-12: Supply Shortage Driving Price Increase

RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Riverstone Holdings - Supply Shortage Driving Price Increase

Riverstone reported robust 1Q20 net profit (+45% q-o-q, +54% y-o-y) on the back of stronger-than-expected margin expansion.
Riverstone is seeing extended order backlogs amid a global glove shortage. We believe more price hikes are likely in FY20F, which could boost margins.
We raise our FY20-22F EPS forecasts by 18.5-33.2%.

Riverstone Holdings (SGX:AP4) reported 1Q20 net profit of RM47m (+45% q-o-q, +54% y-o-y), coming in at 30% of both our and Bloomberg consensus forecasts. The key surprise was stronger-than-expected margin expansion.
GPM widened by 3.6% pts q-o-q and 4.6% pts y-o-y in 1Q20, mainly due to
1. favourable supply-demand dynamics leading to a better pricing environment for Riverstone, and
2. lower raw material prices.

The Covid-19 pandemic has resulted in a surge in glove demand. Besides a severe shortage of personal protective equipment for healthcare workers, there is also new demand coming in from other sectors due to the heightened emphasis on hygiene.
We gather that Riverstone currently has an order backlog of 9 months for healthcare gloves and 3-4 months for cleanroom gloves vs. an average of one month pre-Covid-19 outbreak. Production lines are currently running at c.95% utilisation to fulfil orders (vs. 88-90% in FY19).
Despite delays in the commissioning of the Phase 6 production plant due to the movement control order (MCO) in Malaysia, we forecast Riverstone to record sales growth of 17% y-o-y in FY20F.

We see room for further healthcare glove price hikes in FY20F. According to management, prices for regular customers were raised by c.10% in May 20 while ad-hoc buyers are paying a c.20% price premium to secure orders. The prices of key raw materials, including butadiene and acrylonitrile, have been on a downtrend (average prices YTD are down 37% y-o-y and 31% y-o-y, respectively), which could also benefit cleanroom segment margins.
With the stronger glove demand and margin expansion outlook, we raise FY20-22F EPS by 18-33%. We now expect RSTON to record FY20F net profit of RM210m (+61% y-o-y).

Our Target Price is lifted to S$1.86, based on a higher multiple of 19.3x CY21F P/E (+1 s.d. from its 5-year mean) vs. 17.0x previously (5-year historical mean).
Despite the recent Riverstone share price rally, Riverstone is still trading at a 51% discount to its Malaysian-listed peers (5-year average: 30%).
See Riverstone Share Price; Riverstone Target Price; Riverstone Analyst Reports; Riverstone Dividend History; Riverstone Announcements; Riverstone Latest News.
Potential re-rating catalysts include further price hikes or a continued downtrend in raw material prices.
Key downside risks include weaker cleanroom glove demand.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-12

SGX Stock Analyst Report ADD MAINTAIN ADD 1.86 UP 1.300