Broker's take: DBS boosts Riverstone's TP on glove price surge, full order book

DBS Group Research on Wednesday maintained its "buy" call on Malaysia-based nitrile glove manufacturer Riverstone Holdings, while raising its target price to S$3.90 from S$3.09 previously.

Shares of Riverstone were trading at S$3.02 as at 11.03am, down S$0.08 or 2.6 per cent.

Analyst Ling Lee Keng increased her earnings forecast for Riverstone by 46 per cent for FY20 and by 48 per cent for FY21, thanks to the higher average selling price (ASP) for gloves and improved margins.

She noted that the stock is trading at a discount of about 40 per cent to its peers, at a current price-to-earnings ratio of 21 times on FY20 forecast earnings and 19.8 times on FY21 forecast earnings. "This is unjustifiable, in our view, given its leadership position in the cleanroom segment," Ms Ling wrote.

Riverstone is expected to see its average selling prices (ASP) increase by 45 per cent year on year for healthcare gloves and by 10 per cent for the cleanroom segment in 2020, DBS said. 

Glove ASP and margins have skyrocketed amid the coronavirus pandemic, with ASP being on an uptrend since May this year given the strong demand and tight supply.

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"We expect this rising trend to continue at least till September. Beyond that, ASP could stabilise, and the rate of increase is expected to plateau," the analyst said.

Depending on the pandemic situation, the ASP could gradually normalise in 2022, she added.

DBS also raised its forecast gross margin to 35 per cent for 2020 and 2021, from 27.5 per cent, as the ASP hikes will more than offset the slight increase in costs.

"We are optimistic that Riverstone can continue to generate above-industry margins given its strong market share in cleanroom gloves," Ms Ling said.

The company's order book is fully locked in till June next year, and the group is running at almost full capacity of about 95 per cent utilisation. A second wave of Covid-19 infections could see glove demand sustained at high levels, DBS said, noting that the number of novel coronavirus cases has escalated in recent weeks as the world gradually emerged from lockdowns.

Riverstone manufactures mainly nitrile and natural rubber gloves for the cleanroom and medical industry. It also produces finger cots, masks and packaging bags.

Besides Riverstone, other Singapore-listed rubber glove makers such as Top Glove and UG Healthcare have been barely keeping up with breathless demand. The three stocks' share prices have surged several-fold since the start of this year, although some investors have taken profit in recent days.

CGS-CIMB analyst Ong Khang Chuen told The Business Times that the "stars are aligned" for glove manufacturers this year. He is expecting them to record stronger sales volume, as well as higher ASPs and margins.

However, analysts have also pointed out that such euphoria has overshadowed the overall pain for the global rubber industry, as it ignores the sharp fall in demand for tyres used on planes that have been grounded as a result of travel restrictions during the pandemic.

The global rubber products market is now due to contract by some 3 per cent from a year ago to US$359 billion this year, down from US$370 billion in 2019, a report by ResearchAndMarkets.com showed.