• Riverstone's 2Q20 net profit of RM91m (+95% q-o-q, +180% y-o-y) was above expectations, as we previously forecasted RM72m net profit for the quarter.
• We expect ASP for both healthcare and cleanroom gloves to trend up further till end-CY20, given urgent glove demand globally.
• We forecast sequentially stronger net profit of RM130m (+43% q-o-q, +264% y-o-y) in 3Q20.
• Reiterate ADD, with a higher Target Price of S$5.55 (24.1x CY21 P/E).

Riverstone's 2Q20 Results a Strong Beat

• Riverstone (SGX:AP4)’s 2Q20 net profit of RM91m (+95% q-o-q, +180% y-o-y) was above expectations, as we had forecasted RM72m net profit for the quarter (1H was 37% of our FY20F).
• The key surprise was stronger-than-expected ASP hike in the healthcare segment (+20% q-o-q).
• 2Q20 topline rose 44.9% y-o-y on the back of higher glove sales volume (+26% y-o-y), rise in ASPs, and favourable US$/RM rate.
• 2Q20 GPM widened by 13.6% pts q-o-q and 17.5% pts y-o-y due to higher selling prices, lower raw material prices, and higher economies of scale.

To See Price Hikes in Both the Healthcare and Cleanroom Segments

• Management noted increased urgency in glove demand, and expects selling prices to continue on an uptrend for the remainder of CY20. Riverstone has implemented 3-tier pricing for regular customers; this allows Riverstone to charge higher prices on incremental demand beyond each customer’s usual purchase volume. 15% of healthcare glove volume is being sold at spot price in Aug 20, and we estimate Riverstone’s healthcare glove ASP to grow at a faster pace of +25% q-o-q in 3QFY20 (2Q: +20% q-o-q).
• Demand for cleanroom gloves has also remained strong YTD (1H20 sales volume: +30% y-o-y), and Riverstone plans to carry out its second price hike (c.10%) for this segment in Sep.

Stronger Sequential Earnings Ahead

• Post Malaysia’s movement control order (MCO), Riverstone was able to gradually commission new production lines, we estimate its production capacity to reach 10.5bn pcs per annum by end-FY20 (end-2Q: 9.8bn).
• With higher sales volume and continued ASP hikes, we expect Riverstone to report sequentially stronger net profit of RM130m (+43% q-o-q, +264% y-o-y) in 3Q20.
• We raise our FY20-22F EPS by 15.2-35.7%, mainly to account for higher ASPs, and now expect Riverstone to achieve a record RM426.5m net profit in FY20F (+227% y-o-y).

Reiterate ADD, With Higher Target Price of S$5.55

• Our Target Price for Riverstone is lifted to S$5.55, pegged to 24.1x CY21F P/E, still based on +2 s.d. from its 5- year mean, to reflect the current favourable operating environment for glove players.
• We continue to like Riverstone for its attractive valuations (27% discount to Malaysia-listed glove sector average CY21F P/E of 26.5x). With Riverstone’s strengthened balance sheet, we also see potential for a higher dividend payout ratio going forward.
• Potential re-rating catalysts include stronger demand for gloves and higher selling prices.
• Downside risks include earlier-than-expected availability of a vaccine for COVID-19.

Source: CGS-CIMB Research - 5 Aug 2020