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3Q21: Results In Line But Expect A Sharp Moderation Going Forward

For 3Q21, Riverstone’s net profit of RM266m (+49% yoy/-48.5% qoq) was in line with our estimate, forming 92% of our estimate. However, ASPs for healthcare gloves declined significantly from 2Q21 onwards due to an ongoing supply-demand imbalance. We reduce our 2022 and 2023 earnings forecasts by 18% and 8% respectively. Maintain HOLD with a lower PE-based target price of S$0.68 (S$1.32).

RESULTS

Strong yoy beat for 3Q21. Riverstone Holdings (Riverstone) reported strong 3Q21 results as both revenue (+35.3% yoy) and net profit (+49.2% yoy) grew from the continued demand for both healthcare and cleanroom gloves. 9M21 net profit formed 92% of our 2021 forecasts and gross profit rose by 42% yoy as ASPs remained elevated from pre-pandemic levels. However, on a qoq basis, the decline in healthcare ASPs has taken its toll as revenue (- 34%), gross profit (-48%) and net profit (-48.5%) dropped sharply. This was made worse by Malaysia’s Movement Control Order (MCO) in 3Q21 which caused manpower resources and
utilisation rates to drop. Looking forward, as demand for healthcare gloves start to moderate, we reckon that Riverstone’s super earnings cycle has started.

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Reversion of healthcare gloves’ ASPs underway. ASPs for healthcare gloves have declined in 3Q21 due to unfavourable supply-demand dynamics. Reduced demand from buyers as well as additional supply from China has caused ASPs to normalise sharply. As global demand starts to dwindle, we expect ASPs for healthcare gloves to continue its downtrend for 4Q21 and decline to around US$35/’000pc (US$69/’000pc in 3Q21). However, management has guided that they expect healthcare gloves’ ASPs to stay within US$33- 35/’000pc moving forward. For 2021, we expect healthcare gloves’ ASP to increase by around 71% yoy before declining by 56% yoy in 2022.

Cleanroom gloves’ ASPs remain robust. Demand from long-term tech (semicons, electronics) customers continued to drive demand with 3Q21 cleanroom gloves ASPs at US$120/’000pc (US$110/’000pc in 2Q21). Management has guided that cleanroom gloves demand has been consistent but was unable to take in new orders caused by manpower shortages and a 10-day closure of a cleanroom plant. Moving forward, Riverstone would return focus to the cleanroom segment and commission new lines from the upcoming Phase 8 expansion. We expect ASPs for cleanroom gloves to increase approximately 55% yoy in 2021 and remain unchanged in 2022.

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STOCK IMPACT

Riverstone has already set its sights on longer-term prospects to capture growth beyond the pandemic. This includes developing new and innovative product offerings in untapped markets such as the food processing, pharmaceutical and surgical glove segments. Riverstone’s business model is differentiated from its industry peers due to their high-end cleanroom gloves business which has earned the reputation as a clear industry leader for
over two decades.

Phase 7 to be fully commissioned by 1Q22, Phase 8 underway. Management has noted that plans for Phase 7 were temporarily delayed due to the MCO in Malaysia. However, Phase 7 is expected to be completed by 1Q22. Also, Phase 8 expansion is underway and is expected to add another 1.5b pieces capacity by 2022/23, bringing the total capacity to 13.5b pieces.

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EARNINGS REVISION/RISK

We have cut our 2022/23 net profit forecasts by 18.4% and 7.8% respectively, after revising downwards our ASPs for healthcare (refer to Figure 1). 2021 net profit estimate has remained unchanged as we have also increased our 2021 ASP assumption for cleanroom gloves (refer to Figure 2). We have also increased 2022 tax rate to 30% from 23% given the expected windfall tax implemented by the Malaysian government in 2022, causing the large fall in 2022’s estimate.

• Our gross margins assumptions for 2022/23 are reduced by 1.5ppt/0.5ppt to 34.5%/32.1% respectively. This is to account for the more unfavourable supply-demand dynamics for healthcare gloves due to reduced demand from buyers as well as more supply coming into the market especially from China.

VALUATION/RECOMMENDATION

Maintain HOLD with a lower PE-based target price of S$0.68 (S$1.32), pegged to 5.6x 2022F PE (excluding one-off windfall tax from earnings). We based our valuation at -2SD to Riverstone’s long-term forward PE. We think that Riverstone’s supernormal earnings from the current glove upcycle have started to normalise and given dwindling demand for healthcare
gloves and lower healthcare ASPs; there is significant downside risk to earnings.

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SHARE PRICE CATALYST

• Resurgence of COVID-19 infections.
• Better-than-expected demand for cleanroom gloves.