Riverstone Holdings (RSTON SP) - Maybank Kim Eng 2017-05-05: Cleanroom Glove Outperformed; U/G to BUY

Riverstone Holdings (RSTON SP) - Maybank Kim Eng 2017-05-05: Cleanroom glove outperformed; U/G to BUY RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) - Cleanroom glove outperformed; U/G to BUY


Lucrative cleanroom glove beat; TP +27% to SGD1.05 

  • 1Q17 results beat our expectation. Core earnings met 29% of our FY17E and grew 19% YoY. 
  • The outperformance was due to strong volume growth in the high ASP, high-margin cleanroom segment, at 20% vs our forecast of 7%. This segment has gained good traction from the mobile, tablet and LCD manufacturing industries, as several new customers were secured.
  • We raised our FY17-19E EPS by 17-18%, for better growth in the cleanroom glove segment and higher margin from improved raw material costs. 
  • We rolled forward our valuation base year to FY18E and maintain 16x P/E multiple (+1SD above mean for its product customisation edge); our TP increases by 27% to SGD1.05. Upgrade from HOLD to BUY. 
  • Risks: slowdown in cleanroom glove, spike in raw material price and FX risk.


Demand for healthcare gloves remained robust 

  • Demand for healthcare gloves remained healthy; volume for this segment grew 20% YoY in 1Q17 and the entire 1b new capacity has been taken up.
  • Management attributed this to the strong demand from the US market, a relatively new market for them. At this point, several orders have to be turned down until the additional 1b new capacity starts in 2H17.


Favourable input costs and currency will lift margins 

  • After a sharp spike in synthetic rubber price in 1Q17 (+50% QoQ), it rationalised rapidly in 2Q17 (-50% QoQ), as butadiene facilities closed for maintenance resumed operations. In addition, the USD/MYR FX rate continued to remain stable, despite a mild correction of USD in April.
  • These should lead to better gross margin moving forward, especially for the cleanroom glove segment, as margin saving does not have to be fully passed on.


Raised FY18 expansion and announced plan for FY19 

  • The construction of Riverstone’s phase four capacity expansion is on track to start in 2H17. The original 1b new capacity for FY18 has been raised to 1.4b, in anticipation of better demand. Beyond that, management has also announced the new expansion plan of 1.4b for FY19. 
  • In end-FY19, Riverstone targets to reach 10b glove capacity pa.


Swing Factors


Upside

  • 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.

Downside

  • Snap back of MYR against USD.
  • Sharp rebound of Butadiene price.
  • Slower-than-expected growth of cleanroom gloves, which have higher ASP and margins.




John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-05-05
Maybank Kim Eng SGX Stock Analyst Report ADD Upgrade HOLD 1.05 Up 0.830



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