Riverstone Holdings - UOB Kay Hian 2020-05-13: 1Q20 Strong Beat; Expect Stronger Quarters Ahead From ASP Hike

RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Riverstone Holdings - 1Q20 Strong Beat; Expect Stronger Quarters Ahead From ASP Hike

Riverstone's 1Q20 net profit beat our forecast by 6%, meeting 31% of our full-year estimate. Both healthcare and cleanroom glove segments recorded strong mid-teen revenue growth and are starting to enjoy the benefits of the COVID-19 outbreak as well as lower raw material costs.
Given that ASP hikes would only start in May 20, we expect stronger net profit for 2Q20 and beyond.

We raise our 2020 EPS by 37%, and PE-based target price by 47% to S$2.15 (based on a higher 23.7x FY20 PE). Maintain BUY.

Riverstone Holdings (SGX:AP4)'s 1Q20 revenue and net profit came in at RM279.4m (+16.2% y-o-y) and RM46.6m (+54.3% y-o-y) respectively, forming 24.3% and 31.0% of our full-year expectations.
Riverstone’s gross profit surged 44% y-o-y to RM67.1m in 1Q20 from Rm46.6m in 1Q19, forming 29.5% of our full-year estimate, largely due to falling raw material prices. Falling butadiene prices, due to the drop in oil prices, boosted gross margins significantly, increasing by 4.6ppt y-o-y to 24.0% in 1Q20.

Riverstone’s outperformance in 1Q20 was contributed by the healthcare segment. Due to the substantial demand on the back of the COVID-19 outbreak, sales volume for the healthcare segment grew 18% y-o-y while revenue grew 15.8% y-o-y.
As global demand has outpaced supply, Riverstone’s lead time for healthcare gloves has increased from 3-4 months to 6 months, implying new orders will only arrive at the start of 2021. Despite that, Riverstone has attracted new customers in 1Q20, supported by excess overseas demand from hospitals and distributors battling the COVID-19 outbreak. Furthermore, demand for cleanroom gloves has also increased substantially as most glove makers have diverted resources towards manufacturing healthcare gloves.

The large outperformance in 1Q20 was not underpinned by increases in glove ASPs. According to management, there was no ASP increase in 1Q20 for Riverstone’s healthcare and cleanroom gloves segments. However, from May onwards, we learnt that healthcare gloves ASP is set to increase by 10% for existing customers and 20% for new customers.
With the rise in ASPs coupled with deteriorating raw material prices, we reckon that Riverstone will experience a stronger 2020 than previously forecasted.

Surprisingly, Riverstone’s cleanroom segment experienced resilient volume sales growth of 20% y-o-y as revenue in the segment also grew 17% y-o-y in 1Q20. This was backed by demand from the hard disk drive, semiconductor and pharmaceutical industries. Also, we learnt that there has been no drop in demand for cleanroom gloves during the COVID-19 pandemic. This is significant as cleanroom gloves, with ASP’s 2-3x higher than that for healthcare gloves, contribute roughly 30% of Riverstone’s total revenue and 50-55% of total gross profit.
As management has prioritised the cleanroom segment over the healthcare segment, we believe the cleanroom segment will experience steady resilient growth for the rest of 2020.

With surging demand, management is confident that the new 1.4b capacity from its Phase 6 expansion would help absorb the surging demand arising from the COVID-19 outbreak. Also, Riverstone has set in place Phase 7-8 expansion plans with commencement expected in 2021.

We reckon higher ASPs, coupled with strong demand from both segments, would contribute strongly in 2020 and beyond. We have increased our revenue and earnings estimates for 2020-22.
We raised our forecasts with revenue at RM1,277.8m (+9.7%), RM1,353.9m (+10.1%) and RM1,465.5m (+7.2%), for 2020-22 respectively. Our net profit forecasts for 2020-22 are at RM206.7m (+37.8%), RM224.4m (+40.2%) and RM237.4m (+33.4%) respectively.
The significant increase to our net profit forecasts is due to our higher gross margin assumptions for 2020-22 at 23.9% (+4.4ppts), 23.6% (+3.8ppts), 23.0% (+3.3ppts) respectively, led by higher ASPs and lower raw material costs.

Maintain BUY with a higher PE-based target price of S$2.15 (up from S$1.46) pegged to 23.7x 2020F PE (previously 22x). The higher PE is derived from a 38% discount to the sector’s 38.2x 2020F PE, based on Riverstone’s 5-year average historical PE discount to the sector’s (Top 3 glovemakers) 5-year average PE.
Although Riverstone is trading at all-time highs, it is currently trading at only 17.8x 2020F PE, below the sector’s 38.2x 2020F PE.
See Riverstone Holdings Share Price; Riverstone Holdings Target Price; Riverstone Holdings Analyst Reports; Riverstone Holdings Dividend History; Riverstone Holdings Announcements; Riverstone Holdings Latest News.
In our view, our valuation is justified as Riverstone commands higher EBITDA margins, ROE and dividend yield than most of its peers (excluding Hartalega). We believe the valuation gap is primarily due to its listing outside of its home market of Malaysia. Malaysia-listed glove makers are more closely tracked and better understood due to their combined market size and clout.

Llelleythan Tan UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-13

SGX Stock Analyst Report BUY MAINTAIN BUY 2.15 UP 1.460