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Riverstone Holdings SGX: AP4 - Positive Operating Environment Leading to Higher ASP & Margins

  • Riverstone is running at full capacity; orderbook fully locked in.
  • Margin improvement on higher ASP and lower raw material prices.
  • Demand expected to be strong post COVID-19.
  • Revised earnings up for FY20F/FY21F by 30%/41%; reiterate BUY with higher Target Price of S$3.09.

Riverstone Running at Full Capacity; Orderbook Fully Locked in

  • Due to the surge in worldwide demand for products such as examination gloves and facemasks, Riverstone (SGX:AP4) has been witnessing an uptick in orders from both new and existing customers. New customers, mainly from hospitals, account for 40-50% of total sales. The group is running at full capacity of 95% utilisation currently.
  • Orderbook is fully locked in and any new demand can only be fulfilled next year, likely in January or February, as the Phase 6 expansion to increase production capacity by 1.4bn (+15.6%) to 10.4bn pieces of gloves per annum is expected to be completed by end of this year.
  • Currently, two out of seven lines are already in production. Moving beyond Phase 6, plans are already underway following the group’s acquisition of a 3.8-acre land bank in Taiping where Riverstone intends to construct its new facility and expand capacity further. Going forward, higher production capacity should help to drive revenue higher for the group.

Higher ASP, in Line With Market Trend

  • Average selling price (ASP) is also on a rising trend, due to the strong demand and tight supply. The 10-20% increase in ASP is effective in May/June 2020 onwards. We would not rule out further increase in ASP in 2H20.
  • Other players like Top Glove (SGX:BVA), Hartalega and Kossan Rubber are also raising their ASPs.

Margin Improvement on Higher ASP and Lower Raw Material Prices

  • Besides higher ASP, Riverstone is also benefitting from a lower raw material price environment. The price of butadiene, a key raw material used in the production of its nitrile-based gloves and accounts for 50% of total costs, has shed 66% YTD. The price of butadiene, a by-product of oil, tends to move in tandem with oil prices. Prices of other raw materials, like nitrile, are also trending down, though not as much as butadiene. Hence, a higher ASP and lower raw material prices would lead to further margin improvement.
  • In 1Q20, which did not benefit much from ASP increase, gross margin had already improved by 4.6ppts y-o-y to 24.0%. We expect further improvement in gross margin to 27.5% for FY20F.

Positive Demand and Supply Dynamics

  • Malaysian Rubber Glove Manufacturers Association (MARGMA) has revised up its estimated export of gloves to 220bn pieces in 2020, 20% growth from 2019, amid the current situation.
  • Malaysia is the world’s largest rubber glove producer and contributes nearly 63% of global supply. The industry is in a tight supply situation, with almost all players running at full capacity.

Demand Expected to be Strong Post COVID-19

  • Post the pandemic, we expect the demand for healthcare gloves to remain strong, as hygiene will still be a keen concern going forward.
  • For the cleanroom segment, we continue to expect new technologies like 5G, Artificial Intelligence, and Internet of Things to drive demand for cleanroom gloves.

Revised Riverstone's Earnings Up for FY20F/FY21F by 30%/41%

  • We have raised earnings for Riverstone's FY20F/FY21F by 30%/41% on higher ASP and margins. The operating environment has been very favourable for glove manufacturers. The strong demand and tight supply have led to further increase in ASP while the lower raw material prices have further boosted margins.
  • On the back of the higher earnings, our Target Price is revised up to S$3.09 (previously S$2.20), or PE of 28x (up from 26x, in line with the re-rating of peers) on FY20F earnings, which is at a 30% discount to peers.
Source: DBS Research - 3 Jun 2020

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