• Stellar 1H20 results, riding on improved demand, higher ASP and margins; higher DPS of 4sen.
• Gross profit margins surged to 31.6% from 19.8% last year.
• Riverstone to raise production capacity by 16% to 10.4bn pieces of gloves by FY20F, 14-15bn by 2023.
• Maintain BUY on Riverstone with higher Target Price of S$5.51.

Strong 1H20 Results, Upside Margin Surprise; Expect Stronger 2H20

• Riverstone (SGX:AP4)'s 1H20 results benefitted from about one to two months of higher ASP. Hence 2H20 would be even stronger on the full benefit of the higher ASP and margins.
• Gross margins surged to 31.6% from 19.8% in 1H19, mainly due to higher ASP on the back of tight supply and strong demand.
• A second wave of COVID-19 infections could see glove demand sustained at high levels. Riverstone’s orderbook is fully locked in till June 2021. We expect the ASP uptrend to continue till December, vs our earlier expectation of ASP plateauing from September. We have imputed a 50% y-o-y increase in ASP for healthcare gloves and 10% for the cleanroom segment in FY20F, and flat for both in FY21F.
• Gross margin is projected to further rise to 38% in FY20F and FY21F, from 35%, as ASP hikes more than offset the slight increase in costs.
• At current price-to-earnings (PE) of 26.7x and 25.2x on FY20F and FY21F earnings respectively, Riverstone is trading at a 40% discount to peers. This is unjustifiable, in our view, given its leadership position in the cleanroom segment.

Riverstone's 1H20 Earnings Benefitted From About One to Two Months of ASP Increase

• Riverstone's 1H20 group revenue gained 30.5% y-o-y to RM626.7m, driven by the surge in demand for gloves worldwide. 2Q20 revenue of RM347.3m was up 24.3% q-o-q, mainly due to higher average selling price (ASP).
• Based on our channel checks, Riverstone’s ASP has increased by about 10-20% m-o-m since May 2020 for its Class 1 customers, comprising mainly regulars. For Class 2 customers, which include new customers, e.g. the hospitals, the increase has been 20-40% per month. Meanwhile, Class 3 customers are charged based on spot prices, which could have seen > 50% increase in ASP. Class 1 customers account for 45% of total sales volume, Class 2 make up 40%, while the balance of 15% is from Class 3. Hence, 1H20 earnings reflected about one to two months of the higher ASP.
• As a mark of confidence in Riverstone’s outlook, an interim dividend of 4.00 sen (1HFY2019: 1.55 sen) was declared.

Strong Surge in Margins

• Riverstone's gross profit jumped 108.4% y-o-y to RM197.7m in 1H2020. Gross profit margin improved to 31.6% from 19.8% due to higher ASP.
• Net profit surged 119.3% y-o-y to RM137.5m, on the back of the improved demand, higher ASP and strong margins. 1H20 accounted for 36.5% of our previous FY20F earnings, better than expected as 2H20 would be much strong, benefitting from the full impact of the higher ASP and margins.

Even Stronger Balance Sheet Now

• Riverstone’s core operation continues to generate strong operating cash flows of RM222.2m for 1HFY2020. This bolstered balance sheet strength as the net cash position has more than doubled to RM264.2m as at 30 June 2020.

Capacity Expansion Plans on Track

• The Phase 6 expansion plan to increase production capacity by 1.4bn (+15.6%) to 10.4bn pieces of gloves per annum is expected to be completed by November 2020.
• For longer-term growth, Riverstone is positioning itself to capture future growth with the launch of its new three-year expansion plan at a new production site in Taiping. The new Phases 7 to 9 is projected to grow capacity by up to 1.4 bn pieces per year to bring capacity to 14.0-15.0 bn pieces of gloves by FY2023.

Continued Surge in ASP

• ASP has been on a rising trend since May 2020, due to the strong demand and tight supply. We expect this rising trend to continue at least till end of the year, vs our earlier expectations of September this year. The resurgence of high COVID-19 cases and second wave of infections in some countries after the gradual easing of lockdowns could see glove demand staying high.
• Beyond 2020, ASP could remain high at least until 1H21 as orderbook is full till June 2021.

Higher ASP and Margin Projection

• We have tweaked our ASP assumption up slightly and now project a 50% y-o-y increase in ASP for the healthcare segment for FY20F, vs a 45% previously. No change in ASP rise of 10% y-o-y for the cleanroom segment.
• Gross margins for FY20F and FY21F are also raised to 38% from 35% previously, and net margins increased to 26.6% for FY20F and 26.9% for FY21F, as the increase in ASP would be more than offset the higher raw material and labour costs.

Raised Riverstone's FY20F/21F Earnings by 10%/13%, Higher Target Price of S$5.51

• Overall, on the back of the higher ASP and margins assumptions, Riverstone's net profit for FY20F/21F is raised by 10%/13%.
• Our Target Price for Riverstone is revised up to S$5.51 (previously S$3.90) as we roll forward to FY21F earnings, still pegged to 28.4x PE or +2SD of its 5-year mean forward PE.
• At current PE of 23.7x, Riverstone is trading at 40% discount to peers. Maintain BUY.

Where We Differ

• We are optimistic that Riverstone can continue to generate above-industry margins given its strong market share in cleanroom gloves.

Source: DBS Research - 6 Aug 2020