Riverstone - DBS Research 2021-03-01: Cleanroom Gloves To Provide Sustainable Growth


Riverstone - Cleanroom Gloves To Provide Sustainable Growth

  • Riverstone's FY20 earnings beat our expectations on higher margins; bumper final dividend of RM0.20 declared.
  • Expect robust demand for healthcare gloves in near to medium term.
  • Cleanroom gloves provide earnings resiliency and sustainable growth over the long-term.
  • Slight upward revision to earnings; maintain BUY, target price S$1.85.

Record FY20 earnings; above expectations on better margins

  • Riverstone (SGX:AP4)'s FY20 revenue rose 85.0% y-o-y to RM1.8bn, driven by higher sales volumes for both healthcare and cleanroom glove segments. Gross profit margin expanded to 49.1%, vs 20.1% in FY19, as the strong surge in ASP has more than offset the increase in raw material prices. Net margin of 35.4% was higher than our expectation of 30.5%.
  • Riverstone's record high net profit of RM647.3m was up 396% y-o-y, beating our expectations by 15%.

Bumper dividend.

  • A bumper final and special dividend of RM.020 was declared, bringing Riverstone's total dividend for FY20 to RM0.22 per share (vs RM0.037 in FY19), translating to dividend payout ratio of 50%, vs 42% in FY19.

Expect robust demand for healthcare gloves in near to medium term.

  • Despite the positive developments on vaccines for COVID-19, demand for healthcare examination gloves is expected to remain robust as healthcare systems around the world continue to fulfil immediate supply shortfalls as well as replenish reserves. The ongoing COVID-19 testing and vaccine rollout also requires the usage of gloves.
  • Furthermore, the rise in awareness of hygienic practices globally has led to a higher usage of gloves in the medical as well as other non-medical sectors such as F&B and retail.

Cleanroom gloves to ensure earnings resiliency and sustainable growth over the long-term.

  • 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. Cleanroom gloves currently contribute ~20% to Riverstone’s total earnings.

Secured new customers for cleanroom gloves.

  • During the pandemic, some of Riverstone’s peers in the cleanroom space have shifted their focus to healthcare gloves, which are in great demand and command higher margins. As Riverstone remains committed to the cleanroom space, the group was able to secure new customers, including those in the trending semiconductor space.
  • Hence, as the market leader in the high-end cleanroom glove space, Riverstone is poised to benefit from diversified income streams which allow the group to ensure earnings resiliency for sustainable growth over the longer term.

Firm ASP and demand trend.

  • ASP and demand trends have been firm despite positive developments on vaccines for COVID-19. The ASP for both healthcare and cleanroom gloves in 1Q21 has increased by about 30% to 40% from 4Q20.
  • Going forward, ASP could remain firm, barring any steep increase in raw material prices, as demand is still expected to be strong. Beyond FY22F, ASP could gradually taper down.

Order visibility of about one year.

  • Riverstone’s order visibility is about a year. Prices for healthcare gloves are negotiated monthly, hence prices are not fixed. For cleanroom gloves, prices are now negotiated every two months or quarterly, vs every six months to a year before the pandemic.

An even stronger balance sheet.

  • Riverstone's cash and cash equivalents amounted to RM648.9m as at 31 December 2020, up 400% from end 4Q19.
  • Riverstone 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 1.5bn pieces in 2021 fully taken up.

  • The completion of the Phase 6 of Riverstone’s expansion plans has raised total production capacity by 1.5bn pieces to 10.5bn pieces of gloves annually. The group will add another 1.5bn pieces of gloves in 2021, with the first production line of this new Phase 7 ready in Apr 2021.
  • By the end of 2021, Riverstone will have a total capacity of 12.0bn pieces of gloves per annum. All the new capacity (1.5bn pieces of gloves) has already been booked by customers.

Planning for Phase 8 and 9 from 2022-2023.

  • Riverstone has two further expansion phases in the near-term which will add up to 1.5bn pieces of gloves each year to raise this figure by up to 15.0bn pieces of gloves per annum by end-FY2023.
  • Riverstone has acquired an additional parcel of industrial land at Bukit Beruntung in Jan 2021 (6,740.76 sqm) to support the expansion of production capacity for cleanroom gloves as well as the group’s operations. The new lines coming onboard will allow the group to capture this burgeoning market to drive growth in the coming years.

Slight upward revision to earnings to account for higher proportion of cleanroom gloves.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2021-03-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.850 SAME 1.850