Riverstone Holdings (RSTON SP) - Lacklustre outlook on oversupply; HOLD
EPS cut 7-12%, TP by 7% on lower GM est.
- We cut EPS by 7-12% after lowering our gross margin assumption to reflect the more challenging and competitive environment.
- Maintain HOLD and reduce TP by 7% to SGD0.83, based on an unchanged 16x FY17E EPS (+1SD above mean for its product customisation edge).
- FY16 net profit fell 1% YoY, in-line with our est. with core earnings 100% of our FY16E.
- Despite the challenging environment due to rising competition and a spike in raw material prices, results were supported by:
- robust demand for differentiated and highly profitable cleanroom gloves;
- customisation of healthcare gloves;
- expansion into new markets; and
- the addition of 1b units of new capacity pa.
Challenging macro environment; rising raw mat. cost
- Management highlighted that 1H17 could be challenging due to the 50% QoQ spike in the synthetic rubber price in 1Q17 resulting from maintenance shutdowns at several factories.
- In addition, intensified competition from more supply coming on stream could limit Riverstone’s ability to fully pass on the cost increase.
Mild positives: currency, new markets, cleanroom
- Several positive points are worth noting:
- favourable USD/MYR could offset some cost and competitive pressures (we note that the FX rate appreciated 2.5% QoQ in 1Q17;
- further penetration of new markets, including the US and Japan could broaden product demand; and
- high entry barrier for cleanroom gloves should continue to enable Riverstone to enjoy a stable market share and attractive profits.
Phase four expansion on track
- The construction of Riverstone’s phase four capacity expansion should start in 2H17. We think that its differentiated products can fetch decent demand, at the expense of lower gross margin, amid this oversupply period.
- The expansion will raise total capacity by another 1b to 7.2b units. Management is confident that it can fill up the new capacity based on currently projected customer demand.
- Further strengthening of USD/MYR.
- Further downside to key raw material prices, which are tied to oil prices.
- Better-than-expected product mix upgrade and higher volume growth for high ASP high-margin cleanroom gloves.
- Snap back of MYR against USD.
- Sharp rebound of Butadiene price.
- Slower-than-expected growth of cleanroom glove, which has higher ASP and margin.