Riverstone Holdings SGX: AP4 - Uptrend in ASPs Likely to Continue; Raise Target Price by 24.7%
- As countries start to ease social distancing measures and reopen their economies, Riverstone is set to benefit from a rise in COVID-19 infections as second waves of infections have started to hit some countries.
- The ASP uptrend is expected to continue until 4Q20 while upcoming capacity expansion is set to help absorb overwhelming demand. Thus, we raise our 2020F EPS by 24.3% and PE-based target price by 24.7% to S$3.15 (23.1x 2020F PE).
- Maintain BUY on Riverstone.
ASP Uptrend Expected to Continue Until 4Q20
- As more countries start to experience second waves of COVID-19 infections, we reckon the ongoing ASP uptrend for healthcare gloves will continue until 4Q20-1Q21. Having seen demand for healthcare gloves double its existing production capacity, Riverstone (SGX:AP4) is set to benefit from the continued rise in demand.
- Riverstone has started raising its ASPs in 2Q20. Thus, we expect its earnings to outperform in 2020 as the upcoming ASP revisions coupled with strong sales volume start to be reflected in earnings growth from 2Q20.
Backed by Favourable Industry Tailwinds
- As economies start to re-open and social distancing measures start to ease, more industries have started using gloves as a safety precautions. Through channel checks, we learnt that industries such as restaurants and barbers have started using healthcare gloves.
- Furthermore, government agencies and hospitals are planning to stockpile healthcare gloves post COVID-19 to prevent future shortages. We opine that this will help boost demand for 2021 as demand for healthcare gloves usually moderates post pandemics.
Additional Capacity From Phase 6 Expansion
- Management is confident that the new 1.4b-piece capacity from its Phase 6 expansion would help absorb rising demand from the COVID-19 outbreak. Management expects the first line from the phase 6 expansion to be commissioned in July, with another line every subsequent month. Also, Riverstone has set in place Phase 7 expansion plans with commencement expected in 1Q21.
Increase in Raw Materials Prices
- With oil prices recovering from its Mar-Apr 20 collapse, prices of raw materials for nitrile gloves, butadiene and acrylonitrile have soared 109% and 34.9% from their respective lows in Mar-Apr 20. However, we do not believe there would be much impact on margins as ASPs have risen sharply vs the rise of these raw materials prices. In addition, the current butadiene price of US$650/MT is still well below the 2019 average of US$840/MT.
Raise Our 2020-22 EPS Forecasts, Backed by Favourable Tailwinds
- We reckon the uptrend in ASPs as well as favourable macro tailwinds would start contributing strongly from 2Q20. We raise our revenue forecasts to RM1,506.0m (+12.9%), RM1,593.8m (+15.0%) and RM1,623.7m (+8.1%) for 2020-22 respectively. Our net profit forecasts are RM310.7m (+24.3%), RM321.2m (+19.5%) and RM325.5m (+12.8%) respectively.
- The significant increase to our net profit forecasts is due to our higher gross margin assumptions for 2020 at 28.4% (+1.4ppt), led by higher ASPs.
Maintain BUY on Riverstone With a Higher PE-based Target Price
- Maintain BUY with a higher PE-based target price of S$3.15 (from S$2.53), pegged to the same 23.1x 2020F PE. This is based on +1SD of Kossan’s 3-year forward PE band.
- Although Riverstone's share price is near its all-time high, the stock is trading at only 17.4x 2020F PE, well below the sector’s 37.9x 2020F PE.
- In our view, our valuation is justified as Riverstone commands higher EBITDA margins 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.
Share Price Catalyst
- 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 - 17 Jun 2020