SINGAPORE (May 13): Earnings of Malaysia-based glove and face mask manufacturer Riverstone Holdings soared 54.3% to RM46.6 million ($15.2 million) in 1Q20, from RM30.2 million a year ago, reinforcing that protective health gear are now the hottest investment property.

Revenue for 1Q20 correspondingly increased 16.2% to RM297.4 million from the RM30.2 million recorded in 1Q19, following robust global demand for healthcare products amid the Covid-19 pandemic.

A further boost in earnings came from a downtrend from the prices of Butadiene, a raw material used to produce Riverstone’s nitrile-based gloves.

As such, the group’s gross profit margin strengthened by 4.6 percentage points year-on-year to 24.0% in the quarter.

Riverstone is now ramping up its production levels to match the uptick in orders for health-protective gear from both its new and existing customers. For one, it is looking to increase its production capacity by 1.4 billion or 15.6% to 10.4 billion pieces of gloves per annum by 4Q20. 

This will be done at its new facility, which constitutes phase 6 of Riverstone’s expansion plans, the group states in a regulatory filing on May 11.

“Completion of our new facility for phase 6 of our capacity expansion plans has come at an opportune time, and we are progressively commissioning new lines to satisfy our customers’ urgent need for examination gloves,” notes Executive Chairman and CEO, Wong Teek Son.

“Due to the surge in healthcare glove orders resulting from the Covid-19 pandemic, we have been ramping up production and reducing downtime for our production lines to meet this robust demand”.

As at end March, cash and cash equivalents stood at RM 170.7 million, down from RM 130.3 million a year ago, giving the group sufficient funding capacity to execute its expansion plans.

Looking at the group’s results, CGS-CIMB Ong Khang Chuen says it is 30% higher than forecasts by his team and Bloomberg. “The key surprise was stronger-than-expected margin expansion which widened mainly due to 1) favourable supply-demand dynamics leading to a better pricing environment and 2) lower raw material prices,” he says in a May 12 note. 

Amid a heightened emphasis on hygiene, Ong anticipates Riverstone to see a spike in demand for gloves among both healthcare and non-healthcare sectors. 

Already he notes that the company has an order backlog of around three to four months for cleanroom gloves, as opposed to an average of one month prior to the pandemic. This translates to its present operation level of 95%, as opposed to 88% previously.

To this end, he expects the group to record sales growth of 17% in FY20F bringing earnings up 61% to RM 210 million for the year. DBS analyst Ling Lee Keng has forecast a higher earnings growth of 27%/19% for FY20F/FY21F given the group’s ability to “generate above-industry margins”, particularly for cleanroom gloves.

Both Ong and Ling have posted “buy” or “add” calls on Riverstone at a target price of $1.86 and $2.20 respectively. This is a significant deviation from the $1.47 the group is currently trading at.

To Ling, Riverstone’s current price-to-earnings of 17.7x and 18.3x on FY20F and FY21F sees it trading at a 42% discount compared to its peers. 

“This is unjustifiable, in our view, given its leadership position in the cleanroom segment. We see value in Riverstone’s hard-to-replicate cleanroom business that sets it apart from its competitors,” she stresses in a May 12 note.

As at 1.11pm shares at Riverstone Holdings were up 22 cents of 13.6% to $1.84.