Riverstone Holdings - UOB Kay Hian 2020-11-11: 3Q20 Robust Results; Expect A Strong Finish For 2020

RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Riverstone Holdings - 3Q20 Robust Results; Expect A Strong Finish For 2020

Riverstone reported exceptionally strong 3Q20 results with revenue and net profit surging on higher ASP and overwhelming demand. 9M20 revenue and net profit formed 60% and 62% of our full-year forecasts respectively.
The second wave of infection has sent ASP higher as demand continues to outpace supply. Cleanroom gloves ASP benefitted from a lack of supply. Phase 6 capacity expansion is almost completed.

Riverstone (SGX:AP4) reported robust 3Q20 revenue and net profit on higher ASP and overwhelming demand. See Riverstone Announcements. 3Q20 revenue and net profit soared 92.0% y-o-y and 401.6% y-o-y; 9M20 formed 59.8% and 62.1% of our 2020 forecasts respectively.
Riverstone's 9M20 gross profit rose 390% y-o-y as ASP has risen sharply due to overwhelming demand, and formed 65% of our full-year forecast. Despite an increase in raw material costs in 3Q20, 3Q20 gross margin grew 14.6ppt q-o-q.
We expect Riverstone to end the year with a bang as ASPs of its healthcare and cleanroom gloves continue to rise in Nov 20.

Due to the resurgence of COVID-19 in several countries, Riverstone is seeing strong demand for its healthcare gloves. Its orderbook has stretched to 1H21 even with soaring ASP. Riverstone is unable to fulfil any new spot orders until 1H21 as capacity is almost fully utilised. ASP has been on the uptrend, with an upcoming Nov 20 hike expected to increase blended ASP to above US$70/’000pcs.
Although prices of raw materials have increased by 25% from Sep 20 to Nov 20, management expects ASP to increase 30-35% q-o-q in 4Q20, negating any significant impact on its bottom-line.

Riverstone’s cleanroom gloves segment has emerged as the main beneficiary of the COVID-19 pandemic. The segment has seen an impressive 30% y-o-y increase in sales volume in 1H20 and is expected to grow a further 50% y-o-y in 2H20.
Riverstone’s main cleanroom gloves competitors - Ansell and Kimberly Clark - have shifted their cleanroom gloves production lines to healthcare gloves. An expected hike in Nov 20 is expected to increase ASP to US$85-90/’000pc (usual ASP pre-COVID-19: US$60/’000pcs).

New capacity of 1.5b pieces from phase 6 expansion is set to be fully commissioned by Dec 20, expanding total capacity to 10.5b pieces/year.
Management has also guided that plans for phase 7 are being ramped up, with one double line to be commissioned in Apr 21 and one double line every month from Apr 21 to Sep 21. This brings total capacity to 12b pieces by 4Q21, with some customers already booking capacity from phase 7.

It was reported that Pfizer’s vaccine was 90% effective in preventing COVID-19 among trial volunteers who had no evidence of prior coronavirus infections. This is significant as a vaccine trial with a 90% efficacy rate at such a late and large-scale trial is comparable to previous successful vaccines such as the measles vaccine. However, Riverstone's management said there is still a vast shortage of gloves due to the global resurgence of COVID-19 that there would still be strong demand for gloves until end-21.

We maintain our Riverstone's earnings forecasts and assumptions as we have factored in the expected ASP hikes.
Maintain BUY with ex-bonus issue target price pegged at 15.9x 2021F PE, or -2SD of Kossan Rubber’s 3-year forward PE band. See Riverstone Share Price; Riverstone Target Price; Riverstone Analyst Reports; Riverstone Dividend History; Riverstone Announcements; Riverstone Latest News.
We reckon the supernormal earnings from the current upcycle in 2021 will eventually normalise in 2022. Thus, pegging our target price to a lower PE multiple would have priced this in.

Llelleythan Tan UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-11

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