RIVERSTONE HOLDINGS LIMITED (SGX:AP4)
Riverstone - Vaccine News Overshadows Results
- Riverstone's 3Q20 net profit of RM179m (+96% q-o-q, 5-fold increase y-o-y) was 37% above our expectations, due to stronger-than-expected ASP increase.
- Fundamentals remain solid with further ASP hikes, but recent vaccine newsflow could place a short-term dampener on Riverstone's share price. However, there remain multiple hurdles to widespread availability of COVID-19 vaccines.
- Reiterate ADD on Riverstone with lower target price based on 17.0x CY22F P/E.
Riverstone's 3Q20 results a beat
- Riverstone (SGX:AP4)’s 3Q20 net profit of RM179m (+96% q-o-q, 5-fold increase y-o-y, see Riverstone Announcements) was above expectations, as we had forecasted RM130m net profit for the quarter (9M was 74% of our FY20F).
- Key surprises were stronger-than-expected ASP hike in the healthcare segment and volume growth in the higher-margin cleanroom segment, which led to better topline growth and margin expansion.
Fundamentals remain solid with further ASP hikes
- Price hike momentum remains strong in 4Q20 amid the worsening pandemic crisis and higher raw material prices. Riverstone targets healthcare/cleanroom segment ASPs to grow by 40%/30% q-o-q respectively, and thinks that prices can continue to trend higher in 1Q21F.
- We expect GPM to further expand in 4Q20, as selling prices are rising at a faster pace compared to cost increases. With higher sales volume (as new production lines start commissioning) and continued ASP hikes, we expect Riverstone to report sequentially stronger net profit of RM275m (+54% q-o-q, +760% y-o-y) in 4Q20. On the back of higher ASPs, we lift our FY20-22F EPS forecasts by 39%-112%.
Healthcare segment outlook
- With the resurgence of COVID-19 cases in several countries, there remains an urgent need for gloves. Customers are willing to pay a premium to secure a steady supply of gloves. We understand that Riverstone has been able to raise prices by c.15% monthly in 4Q20 on the back of the global glove shortage and rising raw material costs.
- We estimate that healthcare glove ASPs could reach c.US$70 per thousand pieces by end-Dec 2020. Management thinks that selling prices can continue to grow in 1Q21, and stay high through 2021 as glove demand remains strong.
Cleanroom segment outlook
- Riverstone has seen strong orders in the cleanroom segment, and 3Q sales volume grew by c.30% y-o-y. This was attributable to
- increased usage from existing customers (due to strong performance in the semiconductor/tech industries), and
- customer wins as other cleanroom suppliers/distributors choose to focus on the healthcare industry.
- Currently, Riverstone’s cleanroom processing facilities are running at close to full capacity. As the cleanroom segment has stronger customer stickiness (Riverstone can provide customised offerings to tailor to individual customer needs) and typically commands higher ASP and GPM, management plans to emphasise sustainable growth in this segment.
- Riverstone will further grow its cleanroom processing capacity, and targets sales volume mix for the cleanroom segment to reach 20% by 1Q21F (3Q20: c.15%).
- Cleanroom glove selling prices have also been on the rise. We estimate ASPs to grow by 30% q-o-q in 4Q20F, reaching c.US$90 per thousand pieces by end-Dec 2020.
Rising raw material costs not a major concern
- Due to supply shortages, we understand that raw material prices have been rising in recent months. According to the management, nitrile butadiene (NBR) prices have seen c.20-25% increase monthly in Oct and Nov.
- As some of Riverstone’s key suppliers are currently carrying out periodic maintenance works, management believes NBR could be in short supply till Apr 2021.
- We understand that Riverstone’s new capacity addition this year (Phase 6) are currently producing latex gloves. Although the latex gloves are typically priced at a discount to nitrile gloves, Riverstone was able to sell the gloves at a premium, reinforcing our view that customers are willing to pay a premium to secure capacity.
- Despite the rising costs, we continue to see margin expansion in 4Q20 as we believe the ASP hikes will be more than sufficient to offset the higher raw material prices. With higher sales volume (as new production lines start commissioning) and continued ASP hikes, we expect Riverstone to report sequentially stronger net profit of RM275m (+54% q-o-q, +760% y-o-y) in 4Q20.
- On the back of higher ASPs, we lift our Riverstone's FY20-22F EPS forecasts by 39%-112%.
Vaccine newsflow could be a short-term dampener
- A COVID-19 vaccine being developed by Pfizer and BioNTech was found to be more than 90% effective in an interim analysis yesterday. While we expected positive vaccine updates to surface in 4Q20, the effectiveness of this vaccine has been stronger than expected; this could cause near-term share price correction for glove makers.
- However, we argue that positive vaccine development has been gradually priced in since Aug, as Riverstone's share price retreated from the peak despite continued upward earnings revisions for glove stocks. We have already conservatively priced in ASP declines from 2Q21 onwards in our estimates (as we anticipate the pandemic to be under better control), but Riverstone remains on track to record profits of RM1.1bn (+88% y-o-y) in FY21F.
- See Riverstone Share Price; Riverstone Target Price; Riverstone Analyst Reports; Riverstone Dividend History; Riverstone Announcements; Riverstone Latest News.
- Currently, Riverstone's share price is trading at 11.4x CY22F P/E, which we think has priced in a post-vaccine landscape. There remain regulatory, manufacturing and logistics hurdles to the widespread availability of COVID-19 vaccines. We recommend investors to accumulate on weakness as glove ASPs are likely to stay strong through 2021.
- Reiterate ADD with a lower Target Price (17.0x CY22F P/E, Riverstone’s 5-year historical mean) as we roll over our valuation to end-CY22F. See the comparison of Riverstone with peers (UG Healthcare (SGX:8K7), Top Glove (SGX:BVA), Hartalega, Kossan Rubber and Supermax) in PDF report attached below.
ONG Khang Chuen CFA
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-11-10
SGX Stock
Analyst Report
2.50
DOWN
2.78
