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.

Riverstone Holdings

Share price: 
$2.28

Target: 
$3.09

Any increase in volume can only come from the Phase 6 capacity expansion plan to increase capacity by 1.4bn gloves (+15.6%), which is expected to be completed by end of this year.

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

hands

"At current price-to-earnings (PE) of 20.6x and 19.7x on FY20F and FY21F earnings respectively, Riverstone is trading at a c.50% discount to peers.

"This is unjustifiable, in our view, given its leadership position in the cleanroom segment.
"

--- 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.

Valuation:
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. 


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