RIVERSTONE: UOBKH initiates coverage, $1.46 target

Excerpts from UOB KH report

Analyts: Llelleythan Tan & John Cheong

Beneficiary Of Industry Tailwinds From COVID-19 Chairman and CEO Wong Teek Son. NextInsight file photoA leading global supplier of high-tech nitrile cleanroom gloves, Riverstone has a dominant share of the hard disk drive market. It also manufactures customised nitrile healthcare gloves. With consistent capacity expansion, Riverstone is set to benefit from favourable industry tailwinds from the COVID-19 pandemic and growing middle-income affluence. Given its attractive 48% discount to its peers’ FY20 PE, we initiate coverage with BUY and PE-based target price of S$1.46.

INVESTMENT HIGHLIGHTS
• Global leader in nitrile cleanroom glove market. Riverstone Holdings (Riverstone) specialises in the production of nitrile cleanroom gloves, capturing a 60% global share of the hard disk drive market.

As the production of cleanroom gloves requires high levels of technical capabilities, Riverstone’s customised nitrile cleanroom gloves command ASPs that are 2.5-3.0x higher than that of nitrile healthcare gloves.

Riverstone’s cleanroom segment has been growing at double digits annually.

With the company’s proven track record, we believe this trend will continue with Riverstone securing more orders.

• COVID-19 pandemic has boosted nitrile healthcare gloves sales. With the ongoing COVID-19 pandemic, global demand for healthcare supplies has increased sharply.

Medical gloves, essential for treating the infectious disease, have seen a surge in global demand.

Several countries have begun stockpiling healthcare gloves in a bid to combat the pandemic.

Malaysian glove makers, who are among the largest global healthcare glove suppliers, have seen more orders from new and existing customers for nitrile healthcare gloves.

• Capacity expansion to drive revenue and profits. Riverstone has a newly-completed glove factory under phase 6 of its expansion plans, boosting production capacity to 10.4b pieces/year by 1H20.

Current utilisation rates stand at 90-95%.

Management has purchased land for phase 7-9 of its expansion plans. Phase 7 and 8 are expected to commence in 2020 and 2021 respectively, adding 1.4b pieces/year each and increasing total capacity by 46.7% by 2022.

In view of the higher capacity and favourable tailwinds, we reckon the commissioning of these new production lines would help boost Riverstone’s earnings.

• Changing demographic and macroeconomic trends to lift nitrile healthcare gloves demand. Besides the ongoing COVID-19 pandemic, ageing populations, rising middle income affluence and greater health awareness have contributed strongly to an increase in demand for healthcare gloves.

Developing countries such as China and India have low glove usage per capita, implying huge potential in these countries.

As Southeast Asia contributes almost a third of Riverstone’s revenue, the company stands to benefit from the rising living standards in these highly-populated developing countries.

EARNINGS REVISION/RISK
• Robust revenue and earnings growth for 2020 as COVID-19 is expected to drive up demand. Accounting for the demand surge brought about by COVID-19, we forecast 2020 revenue and net profit to increase 17.8% yoy and 15.3% yoy to RM1165.3m and RM150.4m respectively.

• However, depending on the COVID-19 situation, we expect 2021 revenue and net profit to taper off as the containment of the ongoing pandemic improves. This was observed in the past three global pandemics.

Therefore, we expect 2021 revenue and net profit growth to moderate to 5.5% yoy and 6.7% yoy, and 2022 revenue and net profit to return to strong growth at 11.2% yoy and 10.9% yoy respectively.

• Net profit CAGR of 10.9% in 2019-22. Due to higher revenue and stable margins, we forecast net profit for 2020-22 at RM150.4m, RM160.5m and RM178.0m respectively.

VALUATION/RECOMMENDATION • Initiate coverage with BUY and PE-based target price of S$1.46, pegged at 22x 2020F PE, or a 38% discount to the sector’s 35.2x 2020F PE, based on Riverstone’s 5-year average historical PE discount to the top 3 glovemakers’ 5-year average PE. UOB analyst Llelleythan TanThe stock is currently trading at 18.2x 2020F PE, way below the sector’s 35.2x. • In our view, our valuation is justified as Riverstone commands higher EBITDA margins, ROE and dividend yield than most of its peers (excluding Hartalega). We believe the valuation gap is primarily due to its listing outside of its home market of Malaysia. Malaysia-listed glove makers are more closely tracked and better understood due to their combined market size and clout.

SHARE PRICE CATALYST
• Second wave of global COVID-19 infections, new health epidemics.

Full report here.