Riverstone - UOB Kay Hian 2021-03-01: 2020 Strong Earnings Beat; ASP Uptrend Continues In 1Q21; Target Price Cut To 9.6x P/E


Riverstone - 2020 Strong Earnings Beat; ASP Uptrend Continues In 1Q21; Target Price Cut To 9.6x P/E

  • Riverstone's 2020 net profit of RM647m (+396% y-o-y) beat our estimates by 27%, due to higher-than-expected ASP and net margin. The ASP uptrend has continued in 1Q21 at a double-digit rate on a monthly basis as demand outpaces supply.
  • Riverstone aims to increase its capacity by 1.5bil per year by 2023 to reach 15bil pieces/year.
  • We lower our target price for Riverstone by 42% to S$1.71. We peg our valuation to 9.6x 2022F P/E (16x 2021F P/E previously) to capture the falling ASP trend in 2022 and weaker sentiment.

Riverstone's robust results in line as COVID-19 pandemic rages on.

  • Riverstone (SGX:AP4) reported robust 2020 results as both revenue and net profit surged on higher ASPs and overwhelming demand. 2020 revenue and net profit soared 85% y-o-y and 396% y-o-y respectively, forming 99% and 127% of our 2020 forecasts.
  • Gross profit rose by 351% y-o-y as ASPs rose sharply due to overwhelming demand. In spite of an increase in raw material costs in 4Q20, gross margins improved by 10ppt q-o-q.

Expect 2021 to be another record profit year for Riverstone, but expect ASPs to start declining in 2022.

  • In 2021, we expect Riverstone to maintain its record profit of RM1.1bil (+69% y-o-y) as ASPs continue their uptrend into Mar 21 for both the healthcare and cleanroom glove segments.
  • In 2020, the ASP for healthcare gloves increased around 80% y-o-y. For 2021, we expect the ASP to increase by around 50% y-o-y before starting to fall by 20% y-o-y in 2022.
  • On the other hand, we expect the ASP for cleanroom gloves to increase around 40% y-o-y in 2021 before starting to drop by 20% y-o-y in 2022.

Expect demand for gloves to remain high in the foreseeable future.

  • In the near to medium term, Riverstone expects demand for healthcare examination gloves to remain robust as healthcare systems around the world continue to fulfil immediate supply shortfalls as well as replenish reserves.
  • Riverstone continues to differentiate itself from industry peers via its high-end cleanroom glove business, which has experienced significant growth driven by the advent of 5G technology and manufacturing industries including lenses, batteries and semiconductors.

Cleanroom gloves a surprise winner from COVID-19.

  • Riverstone’s cleanroom gloves segment Ansell and Kimberly Clark - have shifted their cleanroom gloves production lines to healthcare gloves. An expected hike in Mar 21 is expected to increase ASP to US$100/’000pc (usual ASPs pre- COVID-19: US$60/’000pcs).

Phase 6 capacity expansion completed; phase 7 on the way.

  • New capacity of 1.5bil pieces from the phase 6 expansion was fully commissioned in Dec 20, expanding total capacity to 10.5bil pieces per year.
  • Riverstone's management also guided that plans for phase 7 are being ramped up, with one double line set to be commissioned in Apr 21 and one double line every month from Apr 21 to Sep 21. This will bring total capacity to 12bil pieces by 4Q21, with some customers already booking capacity from phase 7.

Riverstone - Earnings revision

  • We raise our Riverstone's 2021 and 2022 earnings forecasts by 28% and 83% respectively, as we factor in the higher-than expected ASPs. We also introduce 2023 financial estimates.

Riverstone - Valuation & Recommendation

Catalysts to Riverstone share price:

  • Multiple waves of COVID-19 infections.
  • Better-than-expected ASP hike and operating leverage.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.71 DOWN 2.990