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


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%.
  • Reiterate ADD, with a higher Target Price of S$1.86 (19.3x CY21 P/E).

Strong 1Q20 results

  • 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.

Extended order backlog amid global glove shortage

  • 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.

More price hikes likely 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).

Reiterate ADD with higher Target Price of S$1.86

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