DBS raises target price on Riverstone on rising glove prices, fatter margins

Singapore

DBS Group Research has raised its target price on Malaysia-based nitrile glove manufacturer Riverstone Holdings to S$3.90 from S$3.09 previously.

In maintaining its "buy" call on the stock, analyst Ling Lee Keng cited higher average selling price (ASP) for gloves and improved margins as reasons.

She has revised upwards her earnings forecast for Riverstone by 46 per cent for 2020 and 48 per cent for 2021.

Riverstone shares closed at S$3.07 on Wednesday, down three cents or 1 per cent.

In a note on Wednesday, Ms Ling wrote that the stock was trading at a discount of about 40 per cent to its peers, at a price-to-earnings ratio of 21 times and 19.8 times, respectively based on the 2020 and 2021 forecast earnings. "This is unjustifiable, in our view, given its leadership position in the cleanroom segment", she wrote.

Riverstone's ASPs are expected to increase by 45 per cent year on year for healthcare gloves and 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.

"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 on the company's gross margin to 35 per cent for 2020 and 2021, from 27.5 per cent previously, as the ASP hikes will more than offset the slight increase in costs.

On the back of strong demand, there is also a shortage of nitrile latex, which has led to its prices rising by some 5 per cent in July compared with June, although the prices of the key raw material, butadiene, remain relatively stable, DBS -noted. Labour costs are also higher, by about 10 per cent.

"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 had 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 are barely keeping up with demand. The trio's stock prices have surged several-folds 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 expects them to record stronger sales volume, as well as higher ASPs and margins.