February 20, 2020

Our recent channel checks reveal that Riverstone Holdings (RSTON) saw ramped-up demand for its healthcare gloves (c.70% revenue contribution), which should keep its utilisation rate high (above 90%) through Jun 2020. The spike in global healthcare glove demand could also lead to more favourable supply-demand dynamics in the healthcare glove sector, and translate into an uplift in RSTON’s healthcare segment margins in FY20F, in our view.

Stronger sales growth of cleanroom gloves (which command higher margin vs. healthcare gloves) could also continue into FY20F, as customers relocating from China to Southeast Asian countries place more orders. With the reacceleration of cleanroom revenue growth, we estimate blended GPM to remain flattish at 20.4% in FY20F, reversing the past four years’ GPM contraction trend (a result of unfavourable revenue mix). This could result in a robust EPS growth of 15.5% yoy in FY20F (FY19F: 5%).

RSTON will announce its 4Q19 results on 25 Feb. We forecast a net profit of RM38m (+6% qoq, +15% yoy) driven by a stronger demand for cleanroom gloves during the quarter. All in, we project FY19F revenue of RM992m (+8% yoy) and net profit of RM136m (+5% yoy).

We are optimistic that RSTON can generate higher volumes for both its healthcare and cleanroom segments in FY20F. Based on our sensitivity analysis, every 1% increase in sales volume could increase Riverstone’s net profit by 1.2%. On the back of higher sales volume assumptions, we raise our FY20/21F EPS forecasts by 4.9%/3.5%.

RSTON will announce its 4Q19 results on 25 Feb. We forecast a net profit of RM38m (+6% qoq, 15% yoy), driven by stronger demand for cleanroom gloves during the quarter. We also expect the pricing competition for healthcare gloves to continue to ease compared with 1H19. RSTON should also benefit from the easier comparison base of 2H18 (which was plagued by volatile raw material price movements and labour shortage), in our view. All in, we project a FY19F revenue of RM992m (+8% yoy) and net profit of RM136m (+5% yoy). The Covid-19 outbreak has caused a spike in demand for medical supplies, including rubber gloves. According to the Malaysia Rubber Glove Manufacturers Association, global glove demand should rise by 15-20% in 2020F (vs. previous expectations of 8-10% annual growth).

RSTON’s 1.4bn capacity expansion (+16%) is expected to commence operations progressively in Feb/Mar 20, allowing the firm to capture additional glove demand from the coronavirus outbreak, in our view. The company is also developing new products to target higher-value markets in the non-cleanroom segment, including gloves for use in surgical, slaughterhouse and food processing applications.  RSTON saw ramped-up healthcare glove demand from its distributors since the onset of Covid-19; orders should keep utilisation rate high through Jun.

Reacceleration of cleanroom glove sales growth will also bode well for RSTON’s margins. We forecast EPS growth of 15.5% in FY20F (FY19F: 5%).  Valuation is attractive; RSTON trades at c.50% discount to its Malaysian-listed peers (in terms of CY20F P/E). Reiterate Add with higher TP of S$1.30.  Potential re-rating catalysts include a better pricing environment resulting in stronger margins; key downside risks include volatile raw material price or forex movements.  Valuation is attractive, as the company is currently trading at a 50% discount to its Malaysian-listed peers (5-year average: 30%). Reiterate Add by CGS-CIMB with higher TP of S$1.30.  Share price closed at $1.05.