• Riverstone's 4Q20 net profit of RM331m (+85% q-o-q, +932% y-o-y) was above expectations. Dividend declared for FY20 of RM0.22 per share also surprised on the upside.
• Fundamentals remain solid with further ASP hikes; Riverstone continues to prioritise its cleanroom segment to lift sustainable earnings.
• Reiterate ADD on Riverstone, with a target price of S$2.30 (15x CY22F P/E).

Riverstone's 4Q20 Results a Beat; Special Dividend Declared

• Despite some shipment delays, Riverstone (SGX:AP4)’s 4Q20 net profit of RM331m (+85% q-o-q, +932% y-o-y) was above expectations due to stronger-than-expected margin expansion, led by stronger ASPs. FY20 net profit of RM647m was above expectations at 110%/117% of our/Bloomberg consensus estimates.
• With the declaration of a special dividend, Riverstone’s FY20 dividend payout ratio is raised to 50% (FY19: 40%). Riverstone's total FY20 dividend amounted to RM0.22 per share, implying a 5.3% dividend yield.

Fundamentals Remain Solid With Further ASP Hikes

• We expect the price hike momentum to continue, amid glove shortages and higher raw material prices. Riverstone targets healthcare/cleanroom glove ASPs to grow by 40%/30% q-o-q to US$95/US$100 per carton in 1Q21F. We expect gross profit margin to further expand in 1Q21F, as the selling price uptrend continues to outpace raw material cost increases.
• Management notes that inventory levels across the supply chain are likely to remain low, with some distributors requesting for air freight recently to meet glove demand. Riverstone continues to focus on maintaining capacity allocation to long-standing customers; its FY21F capacity (including new addition of 1.5bn pcs/annum) has been fully taken up.

Prioritising Cleanroom Segment to Lift Sustainable Earnings

• Riverstone plans to raise its volume mix from its key competitors in this space were unable to cope with the strong demand.
• The cleanroom segment typically contributes higher ASPs and GPMs, and the customer relationship is usually more long term as Riverstone deals directly with the end-customers. We are positive on such move, as we believe it could lift the sustainable earnings profile of the company.

Reiterate ADD on Riverstone, With a Lower Target Price of S$2.30

• We lift our FY21-22F earnings per share forecasts to account for higher ASPs and introduce our FY23F earnings estimates.
• We like Riverstone for its strong earnings prospect in FY21F as it benefits from strong glove demand in both the cleanroom and healthcare sectors.
• Our target price is lowered to S$2.30, pegged to the glove sector’s 5-year mean (15x), as we assume Riverstone’s near-term elevated ASPs may not be sustained in the long run.
• Potential re-rating catalysts include sustained increase in selling stronger-than-expected pricing competition.

Source: CGS-CIMB Research - 26 Feb 2021