Riverstone - Lacking Near-Term Catalysts
- Riverstone (SGX:AP4) registered 1Q22 revenue of RM402.3m (-61.0% y-o-y, -1.9% q-o-q). The erosion of ASP for healthcare gloves has led to a decrease in gross profit to RM154.5m (-78.2% y-o-y, +0.1% q-o-q) in 1Q22 and a decrease in the blended gross profit margin to 38.4% from 68.6% in 1Q21. Net profit, as a result, decreased to RM108.7m (-79.2% y-o-y, -1.8% q-o-q). Revenue and net profit account for 25% and 28% of our full-year forecasts, in line.
- With the majority of the world adopting an endemic approach to COVID-19, demand for healthcare gloves has normalised – a trend that was evident since 4Q21. Demand for cleanroom gloves remains firm, on the back of keen demand from the technology, pharmaceutical, and manufacturing industries such as for lenses, batteries, and semiconductors.
- The ASP for healthcare gloves eased further from about US$37-38 per 1,000 pieces in 4Q21 to about US$25-30 in 1Q22. Average ASP is expected to stabilise at around the US$25 level. We project an ASP of US$24 per 1,000 pieces for FY22F and US$22 for FY23F as more capacity comes online. For the cleanroom segment, prices are expected to remain firm, at slightly above the US$100 level.
- Though ASPs are expected to stabilise, we expect lower margins going forward, mainly due to rising inflationary pressure.
- Though 1Q22 reflected a reduction in raw material prices, mainly due to competition among suppliers – a trend that could last for another one to two months – we would not rule out an increase in prices in 2H22. The price of butadiene, which accounts for the bulk of the raw material costs for nitrile gloves, has surged about 150% to ~US$1,400-1,500/metric tonne, from ~US$600 as at end-2021, on the back of rising oil prices. It is now above the 5-year average of slightly over US$1,000.
- Labour costs, which account for ~15% of total cost, are also on the rise, especially with the implementation of the minimum wage of RMB1,500 in Malaysia from 1 May.
- Utility costs, which account for another ~15% of total cost, are also trending higher on the back of the high oil prices.
- Overall, we have penciled in a lower net margin of 24.3% in FY22F, vs 27% in 1Q22.
- Riverstone's share price has done well year-to-date, surging to a high of S$1.13 in March, before the payment of the final and special dividend of 38 sen (~S$0.122), and surpassed our target price of S$0.97. With a lack of catalysts in the near term after the recent payment of special and final dividend, coupled with margin pressure, we downgrade Riverstone to HOLD.
- No change to earnings forecasts. Our target price for Riverstone is reduced to S$0.82 (previously S$0.97), pegged to its 4-year average P/E of 8.5x (previously 10x) on blended FY22F and FY23F earnings to reflect a more normalised environment.
- We remain positive about Riverstone in the longer term. Riverstone stands out among its peers as the market leader in the high-end cleanroom space. Cleanroom gloves currently account for ~20% in terms of production volume in FY21 and about 25% out of total revenue and earnings. Going forward, we expect the cleanroom segment to contribute about 60% to total earnings. The cleanroom segment is expected to provide earnings resiliency for sustainable growth.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Lee Keng LING DBS Group Research | https://www.dbs.com/insightsdirect/ 2022-05-12 2022-05-12
Previous report by DBS Research:
2021-10-04 Riverstone - Higher Cleanroom Contribution For Earnings Stability
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