Riverstone - UOB Kay Hian 2021-05-12: 1Q21 Strong Beat, Strength Of Cleanroom Gloves Underappreciated

RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Riverstone - 1Q21 Strong Beat, Strength Of Cleanroom Gloves Underappreciated

Riverstone's 1Q21 net profit of RM523m (+1,022% y-o-y/+58% q-o-q) beat our estimate by > 100%, due to higher-than-expected ASP and net margin, as demand continues to outpace supply.
We believe that Riverstone’s cleanroom gloves stand a good chance of maintaining favourable ASP beyond the pandemic, given its unique selling points. Riverstone targets to increase its capacity by 1.5b pieces a year to 15b pieces in 2023.
We raise our Riverstone's target price to S$1.75. Maintain BUY.

Riverstone (SGX:AP4) reported robust 1Q21 results as both revenue and net profit surged on higher ASP’s and overwhelming demand. 1Q21 revenue and net profit soared 270% y-o-y and 1,022% y-o-y respectively, forming 48% of our 2021 forecasts.
Gross profit rose by 955% y-o-y as ASPs have risen sharply due to overwhelming demand. Despite ASP for cleanroom gloves in 1Q21 rising to around US$100/’000pc, it has declined by 5% thus far in 2Q21.

We expect Riverstone to achieve a record net profit of RM1.6b (+144%yoy) in 2021 as ASPs continued their uptrend into Mar 21 for both healthcare and cleanroom glove segments. In 2020, ASP for healthcare gloves increased by around 80% y-o-y. For 2021, we expect ASP to increase by around 83% y-o-y before starting to decline by 30% y-o-y in 2022.
On the other hand, we expect ASP for cleanroom gloves to increase around 41% y-o-y in 2021 before starting to decline by 40% y-o-y in 2022.

Riverstone’s cleanroom gloves stand a good chance of maintaining a favourable ASP beyond the pandemic, given its unique selling points which include:
1. high barrier of entry given the technological know-how, especially the low electrostatic discharge (ESD) requirement for the high-end cleanroom gloves,
2. niche market that is too small for competitors to enter, and
3. cleanroom gloves make up of a small % of overall production cost for end-users.

Riverstone’s cleanroom gloves segment has emerged as the main beneficiary of the ongoing COVID-19 pandemic. The segment has seen sales volume increase by around 40% y-o-y in 1Q21, with an expected 25% y-o-y growth for 2021.
Riverstone’s main cleanroom gloves competitors - Ansell and Kimberly Clark - have shifted their cleanroom gloves production lines to healthcare gloves. An expected hike in Jun 21 should increase ASP to above US$110/’000pc (usual ASPs pre- COVID-19: US$60/’000pcs).

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.

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

We raise our Riverstone's 2021 and 2022 earnings by 45% and 2% respectively to factor in the higher-than-expected ASP.

Maintain BUY on Riverstone with 2% higher PE-based target price of S$1.75, pegged to 9.6x 2022F P/E. We have based our valuation at -1 standard deviation of Riverstone’s long-term forward P/E.
We reckon supernormal earnings from the current upcycle in 2021 will eventually normalise in 2022.
See

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-12

SGX Stock Analyst Report BUY MAINTAIN BUY 1.750 UP 1.710