Riverstone Holdings - CGS-CIMB Research 2020-08-06: Just A Warm-Up Stretch

RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Riverstone Holdings - Just A Warm-Up Stretch

Riverstone's 2Q20 net profit of RM91m (+95% q-o-q, +180% y-o-y) was above expectations, as we previously forecasted RM72m net profit for the quarter.
We expect ASP for both healthcare and cleanroom gloves to trend up further till end-CY20, given urgent glove demand globally.
We forecast sequentially stronger net profit of RM130m (+43% q-o-q, +264% y-o-y) in 3Q20.
Reiterate ADD, with a higher Target Price of S$5.55 (24.1x CY21 P/E).

Riverstone (SGX:AP4)’s 2Q20 net profit of RM91m (+95% q-o-q, +180% y-o-y) was above expectations, as we had forecasted RM72m net profit for the quarter (1H was 37% of our FY20F).
The key surprise was stronger-than-expected ASP hike in the healthcare segment (+20% q-o-q).
2Q20 topline rose 44.9% y-o-y on the back of higher glove sales volume (+26% y-o-y), rise in ASPs, and favourable US$/RM rate.
2Q20 GPM widened by 13.6% pts q-o-q and 17.5% pts y-o-y due to higher selling prices, lower raw material prices, and higher economies of scale.

Management noted increased urgency in glove demand, and expects selling prices to continue on an uptrend for the remainder of CY20. Riverstone has implemented 3-tier pricing for regular customers; this allows Riverstone to charge higher prices on incremental demand beyond each customer’s usual purchase volume. c.15% of healthcare glove volume is being sold at spot price in Aug 20, and we estimate Riverstone’s healthcare glove ASP to grow at a faster pace of +25% q-o-q in 3QFY20 (2Q: +20% q-o-q).
Demand for cleanroom gloves has also remained strong YTD (1H20 sales volume: +30% y-o-y), and Riverstone plans to carry out its second price hike (c.10%) for this segment in Sep.

Post Malaysia’s movement control order (MCO), Riverstone was able to gradually commission new production lines, we estimate its production capacity to reach 10.5bn pcs per annum by end-FY20 (end-2Q: 9.8bn).
With higher sales volume and continued ASP hikes, we expect Riverstone to report sequentially stronger net profit of RM130m (+43% q-o-q, +264% y-o-y) in 3Q20.
We raise our FY20-22F EPS by 15.2-35.7%, mainly to account for higher ASPs, and now expect Riverstone to achieve a record RM426.5m net profit in FY20F (+227% y-o-y).

Our Target Price for Riverstone is lifted to S$5.55, pegged to 24.1x CY21F P/E, still based on +2 s.d. from its 5- year mean, to reflect the current favourable operating environment for glove players.
See Riverstone Share Price; Riverstone Target Price; Riverstone Analyst Reports; Riverstone Dividend History; Riverstone Announcements; Riverstone Latest News.
We continue to like Riverstone for its attractive valuations (27% discount to Malaysia-listed glove sector average CY21F P/E of 26.5x). With Riverstone’s strengthened balance sheet, we also see potential for a higher dividend payout ratio going forward.
Potential re-rating catalysts include stronger demand for gloves and higher selling prices.
Downside risks include earlier-than-expected availability of a vaccine for COVID-19.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-05

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