Riverstone Holdings SGX: AP4 - Positive Takeaways From Conference Call; Raise Target Price by 18%

Riverstone Holdings SGX: AP4 - Positive Takeaways From Conference Call; Raise Target Price by 18%

• We held a conference call with Riverstone (SGX:AP4)’s CEO on 21 May 20. Key takeaways are:
  1. there is robust demand for healthcare gloves and ample room for ASP hike, with ASP hikes only starting in May 20;
  2. cleanroom gloves are enjoying healthy demand, with a surprise ASP hike in Jun 20; and
  3. capacity expansion is set to fully come on line in 4Q20.
• We raise our 2020F EPS by 21% and PE-based target price by 18% to S$2.53 (23.1x 2020F PE). Maintain BUY.

Robust Demand for Healthcare Gloves and Ample Room for ASP Hike

• Demand for healthcare gloves has exceeded production capacity by more than 2x. Lead time has also increased from 3-4 months to 6 months, implying that new orders will only be delivered at the start of 2021. Several industries such as home care and food industries are also starting to use gloves. ASPs for healthcare gloves are set to increase by 10% for regular customers and 20% for non-regular customers in May and June, before increasing by 5% and 10% in July.
• 40% of Riverstone’s healthcare customers are non-regular customers, with 20% being periodic customers and 20% spot buyers. Periodic customers pay a 10% higher ASP as compared with regular customers whilst spot buyers pay about 50-60% more than regular customers.

Cleanroom Gloves Segment Remains Healthy; Surprise ASP Hike

• Strong demand for cleanroom gloves was backed by the hard disk drive, semiconductor, lenses and pharmaceutical industries. What came as a surprise is Riverstone also raising ASP by around 10% for its cleanroom gloves, starting in June.
• Demand remains robust during the COVID-19 pandemic as major cleanroom gloves competitors have shifted production capacity to healthcare gloves. This is significant as cleanroom gloves’ ASP is 2-3x higher than healthcare gloves and has a much higher gross margin.
• Also, cleanroom gloves segment contributes around 50% of Riverstone’s gross profit.

Capacity Expansion Set to Come Fully Online in 4Q20

• With surging demand, management is confident that the new 1.4b capacity from its Phase 6 expansion would help absorb the surge in demand arising from the COVID-19 outbreak. Also, Riverstone has set in place Phase 7-8 expansion plans with commencement expected in 1Q21.

Raise Our 2020-22 EPS Forecasts, Backed by Favourable Tailwinds

• We raise our forecasts with Riverstone's revenue at RM1,334.5m (+4.4%), RM1,385.9m (+2.4%) and RM1,501.5m (+2.5%), for 2020-22 respectively. Our net profit forecasts for 2020-22 are at RM250.0m (+21.0%), RM268.8m (+19.8%) and RM288.6m (+21.6%) respectively.
• The significant increase to our net profit forecasts is due to our higher gross margin assumptions for 2020-22 at 27.0% (+3.1ppt), 27.0% (+3.4ppt), 26.5% (+3.5ppt) respectively, led by higher ASPs and lower raw material costs. Raw material price was down 9% y-o-y in 1Q20 and has fallen 10% q-o-q in 2Q20.

Maintain BUY on Riverstone With a Higher PE-based Target Price

• Maintain BUY on Riverstone with a higher PE-based target price of S$2.53 (up from S$2.15) pegged to a PE multiple of 23.1x (23.7x previously) 2020F PE. Our new valuation method is based on +1SD of Kossan’s 3-year forward PE band.
• We have switched our valuation methodology from ascribing a discount to peers’ PE multiple which included industry leaders such as Top Glove (SGX:BVA) and Hartalega, as we reckon Kossan represents a better comparison in terms of profit size, market cap and industry positioning. Although Riverstone is trading near its all-time high, it is still only trading at 17.0x 2020F PE, well below the sector’s 32.5x 2020F PE.
• In our view, our valuation is justified as Riverstone commands higher EBITDA margins, dividend yield and the highest net cash than most of its peers (comparable to Hartalega).
• We believe the valuation gap is primarily due to its listing outside of its home market of Malaysia. Malaysia-listed glove makers are more closely tracked and better understood due to their combined market size and clout.
• Riverstone share price catalysts:
  • Second wave of COVID-19 infections or new health epidemics.
  • Better-than-expected ASP hike and operating leverage.
  • Potential takeover target given its dominance in the niche cleanroom glove segment.

Source: UOB Kay Hian Research - 26 May 2020

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