• Riverstone's stellar 1Q20 performance, above expectations.
• Benefitting from COVID-19, expect remaining three quarters to be strong on higher ASP and robust demand.
• Raise earnings for FY20F/FY21F by 27%/19% to account for higher ASP and margins.
• Maintain BUY with higher Target Price of S$2.20.

Stronger Growth for the Healthcare Segment

• Riverstone Holdings (SGX:AP4)'s group revenue gained 16.2% y-o-y to RM279.4m. Both the cleanroom and healthcare glove segments continued to record robust sales volume growth. The healthcare segment registered stronger growth due to surging worldwide demand amid the COVID- 19 pandemic.
• The average selling price (ASP) increase for the healthcare segment only comes in May, thus 1Q did not benefit from any ASP rise. The cleanroom segment is less affected by the volatility in ASP as it is locked in via contracts.

Margin Improvement

• Riverstone has benefitted from the downtrending prices of Butadiene, a key raw material used in the production of its nitrile-based gloves. Butadiene price, which tends to move in tandem with oil prices, is down 33% in 1Q20.
• Bolstered by the tailwinds of lower raw material costs, Riverstone’s gross profit margin strengthened by 4.6ppts y-o-y to 24.0% in 1Q20. Net profit surged 54.3% y-o-y to RM46.6m, beating our expectations as it accounts for 31% of our FY20F forecast.

Strong Balance Sheet

• Supported by strong operating cash flows, Riverstone’s balance sheet is even stronger now as its cash balance increased 31% from 4Q19 to RM170.7m as at 1Q20.

Capacity expansion plan on track for 15.6% increase in 2020 to meet higher demand.

• Phase 6 of Riverstone’s expansion plan is on track to lift capacity by up to 1.4bn to a total of 10.4bn pieces of gloves per annum, representing a growth rate of 15.6%, to cater to the increasing demand. Out of a total of seven lines, two are already in production and the remaining lines are expected to be ready by end-2020.
• 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.

Benefitting From COVID-19, Expect Remaining Three Quarters to be Strong on Higher ASP and Robust Demand

• Due to the surge in worldwide demand for products such as examination gloves and facemasks, Riverstone has been witnessing an uptick in orders from both new and existing customers during this period. New customers, mainly from hospitals, account for 40-50% of total sales.
• 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. Riverstone is running at full capacity now at 95% utilisation rate. Any increase in volume can only come from the capacity expansion.

Raise Riverstone's Earnings for FY20F/FY21F by 27%/19%

• We have raised our earnings forecasts for FY20F/FY21F by 27%/19%, to account for the higher ASP for the healthcare segment, and also higher margins. On the back of the higher earnings, target price for Riverstone is revised up to S$2.20, or PE of 26x on FY20F earnings, which is at a 30% discount to peers.
• Riverstone remains our top pick in the Glove Manufacturing sector, on relative valuations. Maintain BUY.

Source: DBS Research - 12 May 2020