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Wednesday, January 20, 2021

Riverstone - Valuations Turning Attractive; Upgrade to BUY

Upgrade Riverstone (SGX:AP4) to BUY as valuation becomes attractive again after share price correction on vaccine news.

  • Firm ASP and demand trend in FY21F; order visibility extends till December 2021.
  • Mass availability of vaccines will take time; new COVID-19 strain raises risk.
  • Riverstone's FY20F/21F/22F earnings forecast adjusted by -16%/+19%/+4% on revision to ASP assumptions.

Riverstone's Valuations Turning More Attractive

Current Riverstone P/E at -1SD of its 5-year average.

  • We had downgraded Riverstone to HOLD in November 2020 (Riverstone - DBS Research 2020-11-10: Time To Take A Breather) when Riverstone's share price was near S$2. Since then Riverstone's share price has corrected by close to 50%.
  • At current level, P/E valuation for Riverstone is becoming more attractive, trading at 7.3x FY21F earnings, which is near -1SD of its 5-year P/E average.

Bumper dividend expected from Riverstone.

  • Riverstone could declare a bumper dividend on the back of exceptionally high profits driven by strong demand and high ASP in year 2020. Dividend per share could more than double to 5 cents in FY20F, based on 40% payout ratio, as compared to 2.42 cents in FY19.

Firm ASP and Demand Trend; Order Visibility Extends Till December 2021

  • ASP and demand trend have been firm despite the positive developments on the vaccines for COVID-19. The ASP for both healthcare (HC) and cleanroom (CR) gloves has increased by about 10% m-o-m on average since April 2020. The increase in November and December was even steeper at about 15% m-o-m. For January and February 2021, the increase in ASP is about 5% to 10%, based on our channel checks.
  • Going forward, ASP could remain firm, barring any steep increase in raw material prices, as demand is still expected to be strong.
  • Riverstone’s order visibility has further extended to till December 2021, from our last update in November of till June 2021. Prices for HC gloves are negotiated monthly, hence prices are not fixed. For CR, prices are now negotiated every two months or quarterly, vs every six months to a year before the pandemic.

Mass Availability of Vaccines Will Take Time; New COVID-19 Strain Raises Risk

Positive vaccines development negative for “COVID beneficiaries”.

  • The world has cheered the positive vaccines development over the last few months. In contrast, share prices of “COVID beneficiaries” like Riverstone were hammered. Riverstone's share price plummeted from a high of S$2.45 in August 2020 to a low at close to S$1 in December.

Low vaccine acceptance rates; new COVID-19 strain raises risk.

  • While the availability of COVID-19 vaccines is good news, it would still take time for life to return to near normal. Low vaccine acceptance rates or distribution delays due to production or logistical difficulties could delay the return to normalcy. Vaccine acceptance appears significantly lower in the US with only ~47% of people surveyed by the Associated Press planning to get the vaccine and 27% being unsure.
  • The emergence of a new COVID-19 strain in the UK that is “70% more transmittable” also raises the risk of a resurgence in COVID-19 community transmission. Several countries have imposed new lockdown measures arising from the surge in in new COVID virus cases and virus mutation.

Sustainable glove demand post-COVID with hygiene still a key concern.

  • Hence, the demand for gloves is expected to sustain as hygiene will still be a key concern. Even if a COVID-19 vaccine is developed, we do not expect demand to taper off immediately.

Beyond FY21F, cleanroom to provide earnings resiliency for sustainable growth.

  • Riverstone’s CR gloves segment contributes ~25% to 30% to total revenue and ~50% to gross profit. Even if demand for the more volatile HC gloves tapers off, demand for CR gloves should be more stable. The CR glove segment has also experienced growth in demand from the technology and manufacturing industries such as lenses, batteries and semiconductors.
  • As the market leader in the high-end CR glove space, Riverstone is poised to benefit from the diversified income streams which allow the group to ensure earnings resiliency for sustainable growth over the longer term.

Riverstone - Earnings Forecast & Recommendation

Expect ASP in FY21F to rise by an average of 35% y-o-y, vs our flat assumption previously.

  • We have adjusted our ASP assumptions, expecting ASP for both HC and CR in FY20F to increase at an average of 60% y-o-y, vs our previous assumption of +70%.
  • For FY21F, given that demand is still expected to be strong while supply remains tight, and the ASP for January and February are still on a rising trend, we now project ASP to increase 35% y-o-y, vs our previous flat assumption.
  • For FY23F, ASP could decline by 35% y-o-y.

-16%/+19%/+4% earnings forecast adjustment for Riverstone in FY20F/FY21F/FY22F.

  • On the back of the ASP adjustment, coupled with slightly lower margins on higher raw materials, we have adjusted our Riverstone's earnings forecast for FY20F/FY21F/FY22F by - 16%/+19%/+4%.
  • Our target price for Riverstone is still pegged to 12.8x, the average P/E over the last 5 years, in line with our valuation methodology for peers in our coverage. However, we have rolled forward our valuation base to blended FY21F/FY22F earnings to capture the post COVID-19 impact. As such, our new lowered target price offers potential upside of 37%.
  • In terms of share price performance, Riverstone's share price has moved in tandem with peers Hartalega and Kossan Rubber but underperformed Top Glove's share price, Supermax and UG Healthcare's share price.
  • Upgrade Riverstone to BUY.

Source: DBS Research - 11 Jan 2021

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