SINGAPORE (Jul 15): Cleanroom product manufacturer Riverstone Holdings receives another clean bill of health with a rosy outlook ahead, owing to strong demand in the face of Covid-19.
DBS Group Research analyst Ling Lee Keng is maintaining “buy” on the glove manufacturer with a raised target price of $3.90, up from $3.09.
“The number of Covid-19 cases has escalated in recent weeks. A second wave of infections could see glove demand sustained at high levels,” notes Ling in a report released today, adding that the company’s orderbook is fully locked in till June 2021.
The company is expected to post an EBITDA of RM524 million ($170.89 million) for FY2020F, a sharp increase from RM206 million in FY2019, notes DBS Group Research.
At current price-to-earnings (PE) of 21.0x and 19.8x on FY2020F and FY2021F earnings respectively, Riverstone is trading at approximately 40% discount to peers. “This is unjustifiable, in our view, given its leadership position in the cleanroom segment,” notes Ling.
Last week, the Singapore-listed company received sustained “buy” and “add” calls by analysts from UOB Kay Hian and CGS-CIMB respectively, citing a squeeze on average selling price (ASP) due to strong demand and tiered pricing.
Ling notes that the company’s ASP has been on a rising trend since May, with the trend expected to continue till September. “Beyond that, ASP could stabilise, and the rate of increase is expected to plateau. Depending on the pandemic situation, ASP could gradually normalise in 2022.”
Riverstone’s ASP has increased by about 10-20% m-o-m since May for its Class 1 customers, comprising mainly regulars, which account for about 45% of total sales volume. For Class 2 customers, new customers like hospitals, the increase ranges from 20-40% per month. Meanwhile, Class 3 customers are charged based on spot prices, which could see more than 50% increase in ASP.
This month, Riverstone introduced a new tier pricing system for its regular customers. Instead of paying US$25 per thousand pieces for 100 million pieces, for example, regular customers pay US$25 per thousand pieces for the first 40 million pieces.
These customers then pay a mark-up of US$27 per thousand pieces for the subsequent 40 million pieces, and spot prices between US$60-70 per thousand pieces for the remainder of their order. However, DBS Group Research cautions that the ASPs, particularly spot prices, are still “very volatile”, changing every few weeks.
DBS Group Research is expecting a 45% y-o-y increase in ASPs for healthcare gloves and 10% for the cleanroom segment in FY2020F, and flat in FY2021F. Gross margin is raised to 35% for FY2020F and FY2021F, from 27.5%, as the ASP hikes more than offset the slight increase in costs, notes Ling.
On the supply side, Riverstone is ramping up manufacturing capacity to 10.4 billion gloves. Out of a total of seven lines, two are already in production and the remaining lines are expected to be ready by November.
In preparation for longer-term growth, the company has acquired a 3.80-acre (165,692 sq ft) parcel of industrial land in Taiping, Malaysia for RM4.2 million ($1.37 million), with plans to construct a new plant there. This should expand its capacity to close to 12 billion gloves per annum by end-2021.
Besides gloves, Riverstone is also engaged in manufacturing and distributing finger cots, packaging bags and face masks.
“In the longer term, post the pandemic, we expect the demand for healthcare gloves to remain strong, as hygiene will still be a keen concern going forward,” notes Ling.
Malaysia is reportedly producing about 65% of the world’s supply of rubber gloves. With the Covid-19 pandemic, an exponential jump in demand for cleanroom products has caught even the country’s largest manufacturer, Top Glove Corporation, by surprise.
Despite producing some 75 billion pieces a year, Top Glove’s nitrile gloves are already oversold by 360 days, said founder Dr Lim Wee Chai in an interview with CNA published today.
As at 11.15am, shares in Riverstone Holdings are trading 1 cent lower, or 0.32% down, at $3.09.
