Glove manufacturer Riverstone Holdings is a “diamond in the rough” says RHB Securities’ Singapore Research team, who is initiating coverage on the counter with a ‘buy’ call and target price of $5.45.
This is believed to give the counter a 50% upside from its $3.64 price on Oct 28, the team says in its initiation note on Oct 29.
“At its current share price of SGD3.64, Riverstone is trading at 8.6x FY21F P/E. This is below its average forward P/E of 13.4x, which we think is unjustified,” they stress.
“Our target price, which implies 12.7x FY21F P/E, is close to its 13.4x average P/E and at a 29% discount to the sector average. The discount reflects its smaller market cap and lower liquidity”.
The analysts expect the Malaysia-based company’s earnings to surge by 262% year-on-year in FY20F ending in December, and 105% year-on-year in FY21F.
Their optimism stems from the surge in the Average Selling Prices (ASPs) of both healthcare and cleanroom gloves, due to the current global shortage of the personal protective gear.
The ASP for Riverstone’s healthcare gloves have inched up by 10% month-on-month since June, and the company expects this uptrend to continue till the end of the year.
69% of its revenue comes from its healthcare division – for which it is an OEM or original equipment manufacturer. The remaining 31% comes from its cleanroom segment in which its gloves are sold under its Riverstone Resources brand for use in cleanroom environments.
Customers from both segments purchase the company’s nitrile gloves – which make up 95% of its total production – or latex gloves which account for the remaining 5%.
The company is now looking to expand its capacity by 42% to 13.5 billion pieces per annum in the next three years. This translates to an addition of 1.5 billion additional pieces per annum in FY20F, FY21F and FY22F, observe the RHB team.
They reckon the company is in good stead to see this through given its strong balance sheet and net cash position of RM264.1 million ($86.8 million) as at end 3Q2020 – an improvement from its RM117.4 million position at end Dec 2019.
This follows the higher net cash flow from operations in 1H2020 which tripled year-on-year, the analysts stress.
As at 12.54pm, shares of Riverstone Holdings were up 18 cents or 4.95% to $3.82.
See also: Riverstone to record 'stronger sequential earnings' in 3Q2020: CGS-CIMB
