Excerpts from CGS-CIMB report

Analyst: ONG Khang Chuen, CFA

Supply shortage driving price increase
■ RSTON reported robust 1Q20 net profit (+45% qoq, +54% yoy) on the back of stronger-than-expected margin expansion.

Riverstone Holdings

Share price: 
$1.62

Target: 
$1.86

■ RSTON is seeing extended order backlogs amid a global glove shortage. We believe more price hikes are likely in FY20F, which could boost margins.

■ We raise our FY20-22F EPS forecasts by 18.5-33.2%. Reiterate Add, with a higher TP of S$1.86 (19.3x CY21 P/E).

Strong 1Q20 results

RSTON reported 1Q20 net profit of RM47m (+45% qoq, +54% yoy), coming in at 30% of both our and Bloomberg consensus forecasts.

The key surprise was stronger-than-expected margin expansion.

GPM widened by 3.6% pts qoq and 4.6% pts yoy in 1Q20, mainly due to

1) favourable supply-demand dynamics leading to a better pricing environment for RSTON, and
2) lower raw material prices.

Extended order backlog amid global glove shortage

9-month backlog

RS Glove Stripping

We gather that RSTON currently has an order backlog of 9 months for healthcare gloves and 3-4 months for cleanroom gloves vs. an average of one month pre-Covid-19 outbreak."

-- CGS-CIMB

The Covid-19 pandemic has resulted in a surge in glove demand.

Besides a severe shortage of personal protective equipment for healthcare workers, there is also new demand coming in from other sectors due to the heightened emphasis on hygiene.

Production lines are currently running at c.95% utilisation to fulfil orders (vs. 88-90% in FY19).

Despite delays in the commissioning of the Phase 6 production plant due to the movement control order (MCO) in Malaysia, we forecast RSTON to record sales growth of 17% yoy in FY20F.

More price hikes likely in FY20F

We see room for further healthcare glove price hikes in FY20F. According to management, prices for regular customers were raised by c.10% in May 20 while ad-hoc buyers are paying a c.20% price premium to secure orders.

The prices of key raw materials, including butadiene and acrylonitrile, have been on a downtrend (average prices YTD are down 37% yoy and 31% yoy, respectively), which could also benefit cleanroom segment margins.

With the stronger glove demand and margin expansion outlook, we raise FY20-22F EPS by 18-33%.

We now expect RSTON to record FY20F net profit of RM210m (+61% yoy).

Reiterate Add with higher TP of S$1.86

OngKhangChuenOng Khang Chuen, CFA, analystOur TP is lifted to S$1.86, based on a higher multiple of 19.3x CY21F P/E (+1 s.d. from its 5-year mean) vs. 17.0x previously (5-year historical mean).

Despite the recent rally, RSTON is still trading at a 51% discount to its Malaysian-listed peers (5-year average: 30%).

Potential re-rating catalysts include further price hikes or a continued downtrend in raw material prices; key downside risks include weaker cleanroom glove demand.



Full report here


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