Riverstone - DBS Research 2021-10-04: Higher Cleanroom Contribution For Earnings Stability


Riverstone - Higher Cleanroom Contribution For Earnings Stability

  • Significant exposure to the cleanroom space a key differentiating factor among peers; especially with the steep drop in the ASP of healthcare gloves.
  • Recent drop in Riverstone's share price presents buying opportunity; ~6% prospective yield on offer.
  • Cut Riverstone (SGX:AP4)'s FY21F/22F/23F earnings forecast by 16%/22%/10% mainly to account for lower ASP assumptions.

Riverstone - Leader in high-end cleanroom gloves sets it apart from peers on the back of the significant drop in the ASP for healthcare gloves.

  • As the market leader in the high-end cleanroom gloves segment with a ~50% market share, Riverstone stands out among its peers with the recent plunge in the ASP for the healthcare gloves while the prices for the cleanroom gloves segment remain relatively stable. From FY22F onwards, earnings contribution from the cleanroom gloves segment is expected to normalise to > 50% of total earnings from ~20% in 1H21. Pre-COVID, earnings from the cleanroom gloves segment accounted for ~70% of total earnings.
  • The current ~20% drop in the share price over the past two weeks presents a buying opportunity. Reiterate BUY with a revised target price of S$1.28.

Recent drop in price presents buying opportunity.

  • Riverstone's share price has dropped ~20% over the past two weeks. We believe this could be due to
    1. the steeper-than-expected drop in ASP,
    2. lockdown in Malaysia impacting upcoming quarterly results. We are expecting a weaker set of 3Q21 results, as compared to 1Q and 2Q21; and
    3. the ex-dividend for 10sen dividend on 20 Sep 2021.

Steep drop in ASP for healthcare gloves.

  • Based on our channel checks, the ASP for healthcare gloves has plunged to about US$40 per 1,000 pieces for delivery in October 2021, from about US$90-100 during the April to June 2021 period, and the high of slightly over US$100 in 1Q21. Key reasons for the significant drop include:
    1. distributors holding high-cost inventory (hence they would need to reduce their stockpile before they can replenish their stocks),
    2. new entrants into the industry selling at lower ASPs in an attempt to gain market share, and
    3. a drop in raw material prices. The key raw material for nitrile glove, butadiene, is now below US$1,000 per metric tonne.

How low can the healthcare gloves ASP go?

  • Based on the current estimated cost of slightly below US$30 per 1,000 pieces of gloves, the ASP is likely to be maintained at above the US$30 level in the near term in order to have a decent gross profit margin of about 20%. Furthermore, demand is still expected to be firm and supply is limited, especially with the recent movement restrictions in Malaysia.
  • In the longer term, the ASP for healthcare gloves could normalise to near the pre-COVID level of about US$20+ per 1,000 pieces. We are projecting average ASP for healthcare gloves at US$32.1 for FY22F and US$25.7 for FY23F.

ASP for cleanroom gloves remains firm.

  • The ASP for cleanroom gloves is still relatively stable, hovering around the US$100-US$120 range since the beginning of this year, based on our channel checks. This could be due to the tight supply and also higher barriers of entry. The lock-in period for the cleanroom gloves ASP is also longer, as prices are negotiated quarterly or half-yearly, as compared to the monthly negotiation for healthcare gloves.

Competitors switched out of cleanroom gloves to healthcare gloves.

  • Furthermore, during the pandemic, some of Riverstone’s competitors in the cleanroom gloves space have switched to the production of healthcare gloves due to the strong surge in the ASP for healthcare gloves. Before the pandemic, the ASP for cleanroom gloves was about 3x that of healthcare gloves but in 1Q21, the ASP for healthcare gloves jumped to above US$100, just slightly lower than cleanroom gloves. But Riverstone remained committed to its existing customers and also managed to gain new customers.

Significant exposure to the cleanroom space a key differentiating factor among peers.

  • With the significant drop in the ASP for healthcare gloves but stable cleanroom gloves price, Riverstone stands out among its peers as the market leader in the high-end cleanroom space. cleanroom gloves currently accounts for ~25% in terms of production volume and about 40% out of the total revenue and > 50% in terms of earnings. Earnings from the cleanroom gloves segment accounted for ~70% of total earnings pre-COVID.
  • Cleanroom gloves to provide earnings resiliency for sustainable growth. 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. Cleanroom gloves are mainly used in the semiconductor and electronics industry, for manufacturing of gadgets like the hard disk drive, mobile phone, tablets, camera lens, and batteries.

Cut in production and slowdown in expansion pace due to MCO.

  • The recent lockdown in Malaysia due to the spike in the COVID cases has affected the supply of gloves.
  • Malaysia is the world’s largest rubber glove producer and contributes nearly 63% of global supply. As a result of the lockdown, Riverstone’s production has fallen by about 20%. The industry is now running at a utilisation rate of about 70%, down from ~90% as a result of the workers’ restriction rule in Malaysia. Expansion plans for some players were also delayed due to the restriction.

Riverstone - Valuations & Recommendation

Cut Riverstone's earnings forecast mainly to account for lower ASP assumptions.

  • We have cut Riverstone's FY21F/22F/23F earnings forecasts by 16%/22%/10% mainly to account for our lower ASP assumptions and also the expected delay in expansion plans, partly due to the movement restrictions in Malaysia. We have adjusted our ASP assumptions down by 5% to 18% for both the healthcare gloves and cleanroom gloves ASPs.
  • We are now expecting US$71.4/US$32.1/US$25.7 per 1,000 gloves for healthcare gloves and US$111.7/US$106.1/US$97.6 for cleanroom gloves for the FY21F/FY22F/FY23F period. The reduction in earnings was partly offset by a higher assumption of cleanroom gloves production, which commands higher margins.

Forecast earnings is still 5x above pre-COVID level.

  • Despite the cut in earnings, earnings projections for Riverstone in FY22F and FY23F is still almost 5x higher than the pre-COVID levels of about RM130m per year.

Maintain BUY on Riverstone; target price lowered to S$1.28.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2021-10-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.770 SAME 1.770