Broker's take: DBS raises Riverstone's target price, citing 'strong surge in margins'

DBS Group Research has raised its target price on Malaysian glove maker Riverstone Holdings to S$5.51, up from S$3.90 previously.

It has also maintained its "buy" call on the counter, citing stellar H1 2020 results, higher average selling prices (ASP) and improved margins.

As at 10.54am on Thursday, shares in Riverstone were trading at S$4.03, down S$0.18 or 4.3 per cent.

In a research note on Thursday, DBS raised its earnings forecast for Riverstone by 10 per cent for 2020, and 13 per cent for 2021.

At the current price-to-earnings ratio of 23.7 times, Riverstone is trading at about a 40 per cent discount to its peers, wrote DBS analyst Ling Lee Keng.

On Wednesday, the mainboard-listed company posted a 119.3 per cent surge in net profit to RM137.5 million (S$45.27 million) for the six months ended June, up from RM62.7 million a year ago. This was driven by a spike in global demand for its healthcare examination gloves, clean-room gloves and face masks.

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For H1 2020, Riverstone's gross profit jumped 108.4 per cent year on year (y-o-y) to RM197.7 million, while gross profit margin improved to 31.6 per cent from 19.8 per cent, due to higher ASP.

Ms Ling is of the view that Riverstone's first-half results benefited from about one to two months of higher ASP and expects the firm's results for the second half to be even stronger, riding on the full impact of the higher ASP and margins. ASP has been on a rising trend since May this year, due to strong demand and tight supply, Ms Ling said.

DBS now expects this uptrend to continue at least till the end of the year, versus its earlier expectations of ASP plateauing from September.

It added that the resurgence of high Covid-19 cases and a second wave of infections in some countries after the gradual easing of lockdowns could see glove demand staying high. Beyond 2020, ASP could remain high at least until H1 2021 as Riverstone's orderbook is full till June 2021, DBS noted.

"We have imputed a 50 per cent y-o-y increase in ASP for healthcare gloves and 10 per cent for the clean-room segment in FY20 forecast, and flat for both in FY21 forecast," Ms Ling said.

DBS also raised its forecast on the company's gross margin to 38 per cent for 2020 and 2021, from 35 per cent previously, as the ASP hikes will more than offset the slight increase in costs.

To capitalise on the favourable demand growth, Riverstone is expanding its manufacturing capacity by about 16 per cent to produce 10.4 billion gloves per annum. Out of a total of seven lines, two are already in production and the remaining lines are expected to be ready by November 2020.

"We expect Riverstone's new production capacity to gradually propel top-line growth at a compound annual growth rate of 19 per cent between FY18 and FY21 forecast," DBS said.

For longer-term growth, Riverstone is positioning itself to capture future growth with the launch of its new three-year expansion plan at a new production site in Taiping. The company plans to grow its capacity to 14 to 15 billion pieces of gloves by 2023.

That said, DBS also noted that a global economic slowdown could impact clean-room sales, while rising competition could erode profitability if Riverstone fails to advance on the technological front.