CGS-CIMB Securities’ liking for Riverstone Holdings has heightened since its earnings announcement for 1H2020 ended June 30.
This comes as the personal protective gear manufacturer’s 95% quarter-on-quarter and 180% year-on-year increase in net profit to RM91 million ($29.8 million) is “above expectations”, says analyst Ong Khang Chen. He had expected the counter’s net profit to come in at RM27 million for the quarter.
The key surprise to Ong came from the stronger-than-expected 20% quarter-on-quarter spike in the Average Selling Prices (ASPs) in its healthcare segment.
See: Riverstone raises interim dividend to 4 sens after 119.3% surge in 1H2020 earnings
Riverstone has a three-tier pricing structure imposed on regular customers. This allows it to charge higher prices for orders that are beyond a customer’s typical purchase volume.
At present some 15% of its healthcare gloves are being sold at spot prices. Ong estimates that the ASPs for these gloves will surge even higher from 1H2020’s 20% to 25% quarter-on-quarter in the current 3Q2020 ending September.
Meanwhile, he notes that Riverstone is also looking to impose a price hike to its cleanroom gloves in September. This follows the 30% year-on-year increase in the volume of these orders in 1H2020.
To this end, Ong expects ASPs of both healthcare and cleanroom gloves to continue on an uptrend as they remain in high demand.
Moving forward he expects the counter to log “stronger sequential earnings” as it adds new production lines. This is slated to bring Riverstone’s yearly production capacity to 10.5 billion gloves by end 2020, some 10.4 billion pieces more than its current levels.
“With higher sales volume and continued ASP hikes, we expect Riverstone to report sequentially stronger net profit of RM130m (+43% quarter-on-quarter, +264% year-on-year) in 3Q20,” says Ong.
For the full year, he is looking at a record net profit of RM426.5 million – up 227% year-on-year.
Ong has correspondingly raised his FY20-22F earnings per share forecast by 15.2 – 35.7% to account for the higher ASPs.
Ong is thus reiterating his “buy” or “add” call on the counter at a revised target price of $5.55. This is up $1.55 or 42% from his previous $3.90 call. He believes the revised price gives a 22.5% upside from its $4.53 close on Aug 6.
Shares of Riverstone were up 22 cents or 4.86% at $4.75 as at 2.04.
