| In its 12 May 2020 report, right after Riverstone's 1Q results release, CGS-CIMB forecasted that Riverstone would clock a 61% jump in net profit for FY2020. But just 9 days later, CGS-CIMB revised its forecast. Riverstone is now expected to record a 103% jump in net profit to RM265m (+103% yoy), according to the latest (21 May 2020) report (excerpts below). |
Excerpts from CGS-CIMB report
Analyst: ONG Khang Chuen, CFA
| When the stars align ■ We reiterate our positive view on RSTON, as its Malaysian peers reported strong Jan-Mar quarter and guided for more ASP hikes in CY20F.
■ We raise our FY20-22F EPS forecasts by 10.6-26.2%; our TP is lifted to S$2.50 (22.7x CY21 P/E). |
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Riverstone currently has an order backlog of nine months (until Jan 2021) for healthcare gloves and 3-4 months (until Jul/Aug 2020) for cleanroom gloves vs. an average of one month pre-Covid-19 outbreak. NextInsight file photoMalaysian peers reported strong 1QCY20 results
RSTON’s peers including Hartalega, Supermax and Kossan announced quarterly results earlier this week.
The three companies averaged 15.5% yoy revenue and 62.4% yoy core net profit growth during the Jan-Mar quarter, on the back of strong margin expansion as raw material prices trended lower.
We also gather that glove makers are now running at full capacity (>90%), and have firm order visibility till at least end-CY20.
Stars are aligned for RSTON
With strong demand due to the Covid-19 outbreak, glove makers are no longer pricing their healthcare gloves using the typical cost-plus mechanism.
Instead, selling prices have been on a sequential uptrend since Mar, despite raw material prices trending lower.
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“The demand for gloves is likely to remain firm for the next 10-12 months, as governments and hospitals will still need to replenish safety stock after the pandemic is contained.” |
RSTON raised prices of its healthcare gloves by c.10% in May 20 for regular customers, while ad-hoc buyers are paying c.20% price premium to secure orders.
With peers guiding for more price increases to come, we are confident that RSTON could further raise selling prices by another 5% qoq in 3Q20F.
Bumper profits in FY20F
Going into 2Q20F, we expect RSTON to record sequentially stronger net profit of RM64m (+36% qoq, +95% yoy).
We raise our FY20-22F EPS by 10.6%-26.2% to account for:
| 1) an increase in glove sales volume, 2) higher ASPs and 3) better profit margins from higher economies of scale and lower raw material prices. |
We now expect RSTON to record FY20F net profit of RM265m (+103% yoy).
Maintain Add, with higher TP of S$2.50
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49% discount |
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Our TP is lifted to S$2.50, based on a higher multiple of 22.7x CY21F P/E (+2 s.d. from its 5-year mean; 19.3x previously) to reflect the current favourable operating environment for glove players.
Potential re-rating catalysts include further price hikes or a continued downtrend in raw material prices; key downside risks include weaker cleanroom glove demand.
Full report here.