|DBS Research has sharply raised its target price of Riverstone Holdings stock from $2.20 (set on 12 May 2020) to $3.09 now.|
Excerpts from DBS report
Analyst: Lee Keng LING
|Higher ASP and margins
Positive demand and supply dynamics to drive ASP and margins higher. Riverstone is running at full capacity now at c.95% utilisation rate.
Given the current strong demand and tight supply situation, ASP is on a rising trend.
Besides higher ASP, Riverstone is also benefitting from a lower raw material price environment.
Price for the key raw material, butadiene, has shed 66% YTD.
Prices of other raw materials, like nitrile, are also trending down, though not as much as butadiene.
Hence, a higher ASP and lower raw material prices would lead to further margin improvement. In 1Q20, which did not benefit much from ASP increase, gross margin had already improved by 4.6ppts y-o-y to 24.0%.
We expect further margin improvement to 27.5% for FY20F.
50% discount to peers
--- DBS report
Where we differ: We are optimistic that Riverstone can continue to generate above-industry margins given its strong market share in cleanroom gloves.
Potential catalysts: Further capacity expansion, sustained increase in cleanroom glove mix (and thus margins), higher ASP and inorganic growth.
Maintain BUY call with higher TP of S$3.09. Earnings for FY20F/FY21F are raised by 30%/41% on higher ASP and margins.
Our TP is pegged to 28x FY20F earnings. This is equivalent to a c.30% discount to its bigger peers.
Key Risks to Our View:
Global economic slowdown. While margins for cleanroom gloves are higher, demand for these gloves could be threatened by a global economic slowdown.
Full report here.