Riverstone Holdings (RSTON SP) - Maybank Kim Eng 2017-08-07: Time To Hang Up The Gloves

Riverstone Holdings (RSTON SP) - Maybank Kim Eng 2017-08-07: Time To Hang Up The Gloves RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) - Time To Hang Up The Gloves


Temporary weakness in margins; Downgrade to HOLD 

  • Riverstone's 1H17 core earnings were in line, at 46% of our FY17E, 2Q17 declined 15% QoQ due to volatile raw material price as the high-cost inventories procured in 1Q17 were recognised. 
  • We expect a better 2H17 as 18% new capacity will start contributing and the raw material price has stabilised.
  • Orders remain firm and phase 4 expansion will be increased by 40%.
  • Maintain EPS and Target Price of SGD1.05 (16x FY18E EPS, +1SD above mean for its customisation edge). Downgrade to HOLD as the Riverstone's share price rally has priced in the positives.


Volatile raw material price impacted gross margin 

  • Gross margin in 2Q17 fell 4.7ppt to 20.5% due to volatile raw material price. We saw a sharp spike in synthetic rubber price in 1Q17 (+50% QoQ); it rationalised rapidly in 2Q17 (-c.70% QoQ), as butadiene facilities closed for maintenance resumed operations. 
  • The higher cost of raw material inventories purchased in 1Q17 was recognised in 2Q17; therefore it resulted in lower gross margin. As the price has reverted to a low level and stabilised, we expect the gross margin to normalise subsequently. 
  • Management indicated that the gross margin in Jun-17 had started to normalise.


Raised expansion to meet rising demand 

  • Phase 4 expansion has been increased by 40% to 1.4b gloves pa, to match the rising demand from customers. 
  • To recap, the original plan was to increase production capacity by 1b gloves in 2017 and by 1.4b gloves pa for the following years. Two out of seven new production lines will commence production in Aug 2017 and the rest of the lines will be commissioned by 2017. 
  • The indicated orders for both cleanroom and healthcare segments remain firm.


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/ 2017-08-07
Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade ADD 1.050 Same 1.050



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