• Perceived rubber glove play looks sheltered from trade-war fallout with 50% of sales fuelled by healthcare glove consumption in the US and Europe.
• The structural shift from vinyl gloves (produced in China) to nitrile could possibly be exacerbated amid tariffs on vinyl, favouring Riverstone.
• Maintain ADD. Our Target Price of S$1.30 is based on 16.7x FY19F P/E.

Perceived Rubber Glove Play Sheltered From Trade War

• Riverstone is a Malaysia-based rubber glove play that could offer some shelter from the trade war, in view of resilient demand for its nitrile rubber gloves.
• Sales to the US are trending upwards and formed 19% of Riverstone’s FY17 sales at RM159m. More stringent US Pharmacopeia (USP) Convention standards (requires double-gloving for workers handling hazardous drugs) that will come into effect in Dec 2019 could fuel US demand further.
• China accounted for 7% of FY17 sales at RM55m, comprising mainly gloves and cleanroom consumables.
• Riverstone’s annual glove capacity is set to expand 18% to 9bn pieces by end-FY18F and another 16% to 10.4bn by end-FY19F. This underpins our 14% CAGR in our FY18-20F sales growth forecasts.

Tariffs Could Possibly Exacerbate Shift From Vinyl Towards Nitrile

• With nitrile gloves accounting for 94% of its FY17 sales, Riverstone is benefiting from a structural shift away from vinyl (PVC) gloves produced in China towards nitrile gloves globally as China tackles air pollution and curbs vinyl glove manufacturers’ production.
• Though medical gloves are not included in the US tariff list, tariffs on finished goods containing PVC could dampen the demand for PVC in China. This could exacerbate production cuts for PVC-based goods (including gloves) and facilitate the shift towards nitrile gloves, which we believe could benefit Riverstone.

Healthy Balance Sheet to Boot

• At end-Sep 18, Riverstone had a net cash position of RM86m, supporting further capacity expansion without running into any solvency risk.
• We project 3% dividend yield in FY19-20F, based on a conservative 40% payout and supported by 12-22% EPS growth forecasts in the same period.

Maintain ADD

• At 16x FY19 P/E, we see Riverstone as a laggard play, trading at 22% discount to Malaysian peers’ average of 20x.
• We retain our ADD call and Target Price of S$1.30, pegged to 16.7x FY19F P/E that represents 16% discount to its Malaysia peers’ average.
• Re-rating catalysts could come from better-than-expected margins and earnings growth.
• Increase in raw material costs remains a key risk.

Source: CGS-CIMB Research - 17 Dec 2018