Riverstone - DBS Research 2020-11-10: Time To Take A Breather


Riverstone - Time To Take A Breather

  • Downgrade Riverstone to HOLD as we believe the positives are mostly priced in; expect ASP trend to stabilise in FY21F and decline in FY22F.
  • Riverstone's 3Q20 results above expectations on strong demand and high ASP.
  • Expect a strong 4Q20; raised Riverstone's FY20F/FY21F earnings forecast by 70%/62% on strong ASP surge.

Riverstone's 3Q20 results above expectations on strong demand and high ASP.

  • Riverstone (SGX:AP4)'s 3Q20 earnings jumped 4-fold y-o-y to RM178.6m (+96.4% q-o-q) on the back of the almost doubling of revenue to RM482.3m (+38.9% q-o-q). Demand for gloves remained strong amid the COVID-19 pandemic while ASP has maintained its upward momentum since June 2020. See Riverstone's announcements.
  • On a 9-month basis, revenue and net profit accounted for 73% and 80% of our FY20F forecasts respectively, above expectations as we are expecting a stronger 4Q20.

Strong ASP surge to continue at least until 1Q21.

  • ASP for both healthcare and cleanroom gloves has increased about 10% m-o-m on average for the last few months. The increase in November and December has been even steeper at about 15% m-o-m. The rising ASP trend could continue in 1Q21, but the magnitude would depend on raw material prices as demand is still expected to be strong.

Record-high margins.

  • The strong upward momentum for ASP led to a record-high gross margin 52.2% in 3Q20, up from 37.6% in 2Q20 and 20.5% in 3Q19. On a 9-month basis, its gross margin is 40.5%.

Order visibility until June 2021.

  • The resurgence of high COVID-19 cases and second or even third wave of infections in some countries have led to glove demand staying high.
  • Due to the strong demand for both healthcare and cleanroom gloves, Riverstone’s current order book is full until the first half of 2021.
  • However, ASPs are not locked it yet as price negotiations are typically on a quarterly basis for cleanroom and monthly basis for healthcare gloves.

Even stronger balance sheet.

  • Cash and cash equivalents amounted to RM427.3m as at 30 September 2020, up 228% from RM130.4m as at end 4Q19. The group remains well-positioned to execute its expansion plans for future growth, and weather the macroeconomic headwinds associated with the COVID-19 pandemic.

New capacity from phase 7 for 1.5 billion pieces in 2021 fully taken up.

  • Phase 6 of Riverstone’s expansion plans is on track to raise total production capacity by 1.5 billion pieces to 10.5 billion pieces of gloves annually by the end of 2020.
  • Construction of Riverstone’s latest production facility for phase 7 of its expansion plans is currently ongoing. With phase 7, the group will add seven production lines in 2021, with the first line of this new phase ready in April 2021. This is expected to add up to 1.5 billion pieces of gloves to bring total annual production capacity by up to 12.0 billion pieces by 4Q2021.
  • At this early stage, all of the new capacity coming online for phase 7 has already been taken up by Riverstone’s customers.

Adding another 1.5 billion pieces by end FY2023.

  • Beyond Phase 7, Riverstone intends to increase its production capacity by up to 1.5 billion pieces of gloves annually for a total of up to 15.0 billion pieces by end-FY2023, representing approximately 59% growth from the expected capacity of 10.5 billion gloves at the end of FY2020.

Windfall tax speculation ends.

  • In Malaysia’s Budget 2021, the government announced that there will be a combined RM400m contribution from the four major glove companies (Top Glove (SGX:BVA), Hartalega, Supermax and Kossan Rubber) to combat COVID-19, ending the speculation of a potential windfall tax for glove manufacturers. This should remove some of the overhang for the glove stocks.

Sustainable demand post-COVID with hygiene still a key concern, but news of vaccine likely to cap Riverstone's share price performance.

  • Demand for gloves is still expected to sustain as hygiene will still be a key concern. Even if a COVID-19 vaccine is developed, demand will not taper off immediately as the timeline for sufficient access to vaccines to contain the global pandemic is still uncertain. The announcement by
  • Pfizer of a highly successful interim result of 90% effectiveness for its COVID-19 vaccine could affect market sentiment for glove manufacturers. Going forward, more news of vaccine discovery and mass production will likely cap Riverstone's share price performance.

Beyond FY21F, cleanroom to provide earnings resiliency for sustainable growth.

  • Riverstone’s cleanroom gloves segment contributes c. 25% to 30% to total revenue and c.50% to gross profit. Even if demand for the more volatile healthcare gloves tapers off, demand for cleanroom gloves should be more stable. The cleanroom glove segment has also experienced growth in demand from the technology and manufacturing industries such as lenses, batteries and semiconductors.
  • As the market leader in the high-end cleanroom glove space, Riverstone is poised to benefit from the diversified income streams which allow the group to ensure earnings resiliency for sustainable growth over the longer term.

Raised Riverstone's FY20F/FY21F earnings forecast by 70%/62% on the strong ASP surge.

  • As the ASP momentum should still be intact at least until 1Q21, we have raised our Riverstone's FY20F/FY21F earnings estimates by 70%/62%. 4Q20 is expected to be another strong quarter, as the ASP increase for November and December has been even stronger at an average of 15% m-o-m (vs average of 10% m-o-m in the last few months).
  • We have pegged our Target Price to 13x average PE over the last 5 years, in line with our valuation methodology for its peers in our coverage. On the back of the supernormal earnings, we have applied a lower valuation peg. In terms of PE valuation, Riverstone is still trading at a discount of c.40% to peers. See Riverstone's target price.

Downgrade to HOLD; expect Riverstone's ASP trend to stabilise in FY21F and decline in FY22F.

  • Riverstone's share price has surged c.400% year-to-date, ahead of the strong fundamentals on the back of strong demand and surge in ASP, leading to the company’s supernormal profits in FY20F.
  • For FY21F, we expect ASP for the cleanroom glove segment to hold up better than the healthcare glove segment. Overall, we are projecting ASP to be flat in FY21F vs FY20F. For FY22F, we have factored in a 20% to 30% y-o-y decline in ASP.
  • See Riverstone Share Price; Riverstone Target Price; Riverstone Analyst Reports; Riverstone Dividend History; Riverstone Announcements; Riverstone Latest News.
  • Looking beyond the supernormal earnings in FY20F, FY21F earnings are expected to register a slight growth of 4%, followed by a 39% decline in FY22F. We believe that the steep rise in ASP is nearing the end and price should be more stable in FY21F, and to decline in FY22F.
  • Most of the positives are also already priced it, in our view, hence we downgrade our call for Riverstone to HOLD.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-11-10
SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.03 DOWN 2.76