Riverstone - DBS Research 2021-08-10: Cleanroom Gloves For Sustainable Growth

RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Riverstone - Cleanroom Gloves For Sustainable Growth

Riverstone (SGX:AP4) reported strong 1H21 results, slightly above expectations; a higher interim dividend was declared.
Record high gross profit margin of 69.1% in 1H21, benefitting from higher ASPs.
Expect gradual decline in ASP for healthcare gloves in 2H21; though cleanroom gloves ASP should be more stable.
Beyond pandemic surge, sustainable growth to be driven by
1. resilient earnings from Cleanroom segment and
2. new products for new markets.

Riverstone's revenue for 1H21 surged 222% y-o-y to RM2.0bn. This was driven by the surge in demand for the group’s healthcare gloves examination and high-tech cleanroom gloves amid the global COVID-19 pandemic. Net profit jumped 657% to RM1.0bn, accounting for 66% of our forecast, slightly above expectations, even though we are expecting a weaker 2H on the back of the easing ASP.

A higher dividend of 10 sen was declared vs 4 sen in 1H20. We are expecting a dividend payout ratio of 35% from Riverstone in FY21F, vs 50% in FY20. That works out to a dividend yield of ~9.5% based on the current price and our estimates.

The gross profit margin grew 37.5 percentage points y-o-y and 10.9 percentage points q-o-q to 69.1% as the group benefitted from higher ASPs for its glove products.

We expect the ASP for healthcare gloves to ease in 2H21, on the back of the increasing supply from capacity expansion plans by the existing players and new players coming onboard. The ASP for healthcare gloves has already seen a US$10-US$15 decrease per 1,000 pieces in June. We expect this trend to continue and to stabilise at about US$45 per 1,000 pieces vs the current price of about US$105.

The ASP for cleanroom gloves is expected to be less volatile, as prices are negotiated on a longer-term basis vs monthly for healthcare gloves. The cleanroom gloves segment is also less competitive vs the healthcare gloves division. Some of Riverstone’s competitors have also switched to producing healthcare gloves during the COVID-19 pandemic period. Hence, supply for cleanroom gloves is tight now. Furthermore, the barriers to entry for cleanroom gloves is also higher as compared to healthcare gloves.

Despite the positive developments on vaccines for COVID-19, demand for healthcare gloves is still expected to remain robust as healthcare gloves systems around the world continue to fulfil immediate supply shortfalls and replenish reserves. Furthermore, the recent resurgence of the COVID-19 pandemic globally and the rise in awareness of hygienic practices globally have led to a higher usage of gloves in the medical as well as other non-medical sectors such as F&B and retail.

Riverstone has completed construction of its new production facility for Phase 7 of its expansion plan. Overall, the group is to add seven production lines in total for Phase 7, which is expected to add up to 1.5bn pieces of gloves to bring total annual production capacity by up to 12.0bn pieces by the end of 2021. The first line is expected to be ready in September/October this year, a slight delay from May, due to the lockdown in Malaysia. Similarly, another 1.5bn pieces of glove capacity will be subsequently added each year in FY22 and FY23 to bring total annual production capacity to 15.0bn pieces of gloves by the end of 2023.

The group has set its sights on longer-term prospects to capture growth beyond the pandemic situation. This includes developing new and innovative product offerings that will allow it to venture into untapped markets such as the food processing, pharmaceutical, and surgical glove segments.

As the market leader in the high-end cleanroom gloves space with about 50% market share, Riverstone is poised to benefit from the diversified income streams that allow the group to ensure earnings resiliency for sustainable growth beyond the pandemic situation. The group recently acquired a new industrial land bank in January 2021 for the development of its new cleanroom gloves processing facility, which will raise its processing capabilities to more than 2.5 billion pieces of cleanroom gloves per annum, up from the current 2.0 billion.

3Q21 is expected to see a steeper drop in the ASP for healthcare gloves, as customers, mainly distributors, cut down on their orders, in anticipation of a further drop in the ASP and the new capacity coming onstream. The drop in the ASP for healthcare gloves, coupled with the slight production cut of about 5% of total production due to the lockdown and the temporary shutdown in production for some of the plants due to COVID-19 infections, would lead to a weaker 3Q, as compared to 2Q21 and 1Q21.

We have tweaked earnings of Riverstone for FY21F and FY22F up by 2%/4% respectively on the back of the more stable ASP for cleanroom gloves. We have also added earnings forecasts for FY23F. Though earnings in FY22F/FY23F is projected to drop 20% to 50%, it is still 5-6x higher than the pre- COVID-19 level.
See
Target price is reduced to S$1.77, as the slightly higher earnings revision is offset by a lower P/E peg of 10x (vs 11x previously), still on its four-year average P/E on FY22F earnings. Maintain BUY on Riverstone.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2021-08-10

SGX Stock Analyst Report BUY MAINTAIN BUY 1.77 DOWN 1.860