Brokers' take: Analysts see strong demand for gloves lifting Riverstone FY20 earnings

RESEARCH houses remain bullish on their FY2020 outlook for Riverstone Holdings, which is set to benefit from strong demand for healthcare and cleanroom gloves amid the Covid-19 outbreak.

In a Wednesday report, CGS-CIMB analyst Ong Khang Chuen wrote: "We believe the spike in global healthcare glove demand could lead to more favourable supply-demand dynamics in the healthcare glove sector, and translate into an increase in Riverstrone's healthcare segment margins in FY2020."

Furthermore, Riverstone is working on expanding capacity by 16 per cent for FY2020, which should gradually lift "production line speed to cope with the surge in demand", he added.

CGS-CIMB has forecast Riverstone's sales volume to grow 20 per cent year on year for FY2020, with healthcare gloves contributing 85 per cent of the volume and the higher-margin cleanroom segment contributing the remaining 15 per cent.

Coupled with the likelihood of raw materials prices remaining low, DBS Group Research analyst Ling Lee Keng believes overall gross margin for the glove maker is expected to remain above 20 per cent, higher than the industry average of about 18 per cent.

Based on DBS Group Research forecasts, Riverstone shares were trading at a forward price-to-earnings of 15.9 times for FY2020 and 15.3 times for FY2021 as at Wednesday's closing of S$1.05.

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At that level, Riverstone is trading at about a 45 per cent discount to its peers, which Ms Ling noted was "unjustifiable" given Riverstone is a market leader in the cleanroom segment.

"We see value in Riverstone's hard-to-replicate cleanroom business that sets it apart from its competitors. Glove makers are generally regarded as defensive and relatively more stable given their resilient demand," she added.

On Tuesday after market close, the Malaysian-headquartered glove maker reported a 3 per cent dip in Q4 net profit to RM32.1 million (S$10.6 million), while revenue was flat at RM257.4 million.

Riverstone attributed the dip in bottom line to higher tax expenses, due to a lower reinvestment allowance.

CGS-CIMB has a "add" call on Riverstone with a target price of S$1.30. DBS has a "buy" recommendation with a price target of S$1.34 for the glove maker.

Riverstone shares were flat at S$1.05 as at 11.15am on Thursday.