Riverstone Holdings - CGS-CIMB Research 2020-05-21: When The Stars Align

RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Riverstone Holdings - When The Stars Align

We reiterate our positive view on Riverstone, as its Malaysian peers reported strong Jan-Mar quarter and guided for more ASP hikes in CY20F.
Stars are aligned for Riverstone in FY20F, with
1. stronger sales volume,
2. higher ASPs, and
3. higher margins (due to lower raw material prices).

We raise our FY20-22F EPS forecasts by 10.6-26.2%; our Target Price is lifted to S$2.50 (22.7x CY21 P/E).

Riverstone Holdings (SGX:AP4)’s peers including Hartalega, Supermax and Kossan announced quarterly results earlier this week. The three companies averaged 15.5% y-o-y revenue and 62.4% y-o-y core net profit growth during the Jan-Mar quarter, on the back of strong margin expansion as raw material prices trended lower.
We also gather that glove makers are now running at full capacity ( > 90%), and have firm order visibility till at least end-CY20.
See glove manufacturer peer comparison table in attached PDF report.

With strong demand due to the Covid-19 outbreak, glove makers are no longer pricing their healthcare gloves using the typical cost-plus mechanism. Instead, selling prices have been on a sequential uptrend since Mar, despite raw material prices trending lower.
Riverstone raised prices of its healthcare gloves by c.10% in May 20 for regular customers, while ad-hoc buyers are paying c.20% price premium to secure orders. With peers guiding for more price increases to come, we are confident that Riverstone could further raise selling prices by another 5% q-o-q in 3Q20F.
The demand for gloves is likely to remain firm for the next 10-12 months, as governments and hospitals will still need to replenish safety stock after the pandemic is contained.

Going into 2Q20F, we expect Riverstone to record sequentially stronger net profit of RM64m (+36% q-o-q, +95% y-o-y). We raise our FY20-22F EPS by 10.6%-26.2% to account for:
1. an increase in glove sales volume,
2. higher ASPs and
3. better profit margins from higher economies of scale and lower raw material prices.
We now expect Riverstone to record FY20F net profit of RM265m (+103% y-o-y).

At end-Mar 20, Riverstone had commissioned two new production lines (out of a total of seven production lines) of its Phase 6 production facility. We understand that the commissioning of new lines has been affected by the movement control order (MCO) in Malaysia but Riverstone will speed up commissioning of the new lines once the order is lifted. Once completed in 4Q20F, the total production capacity of Riverstone will be lifted to 10.4bn pcs per annum.

Our Target Price is lifted to S$2.50, based on a higher multiple of 22.7x CY21F P/E (+2 s.d. from its 5-year mean; 19.3x previously) to reflect the current favourable operating environment for glove players.
See Riverstone Holdings Share Price; Riverstone Holdings Target Price; Riverstone Holdings Analyst Reports; Riverstone Holdings Dividend History; Riverstone Holdings Announcements; Riverstone Holdings Latest News.
Despite the recent rally, Riverstone continues to be a laggard play in the glove sector, as it is trading at a 49% discount to its Malaysia-listed peers (5-year average: 30%, see attached PDF report for peer comparison).
Potential re-rating catalysts include further price hikes or a continued downtrend in raw material prices; key downside risks include weaker cleanroom glove emand.
See attached 15-page PDF report for complete analysis.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-21

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