Riverstone Holdings (RSTON SP) - Maybank Kim Eng 2017-11-09: Positive Outlook Priced In

Riverstone Holdings (RSTON SP) - Maybank Kim Eng 2017-11-09: Positive Outlook Priced In RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) - Positive Outlook Priced In


Boost from lower raw material costs & product mix 

  • Riverstone's 9M17 core earnings were in line at 71%/73% of our/consensus FY17E; 3Q17 increased 21% YoY and 20% QoQ. The growth was due to higher gross margin from lower raw material costs and better product mix.
  • Phase 4 expansion, which will raise capacity by 23%, is on track; 4 out of 7 production lines have started and most will be up by end-2017. Also, indicative future orders remain firm and 4Q17 should improve after resolving a temporary electricity supply disruption. 
  • Maintain HOLD as the positive outlook is priced in given unchanged SGD1.05 TP, which is based on 16x FY18E EPS (+1SD to mean due to healthy EPS growth and ROE).


Lower raw material costs & more cleanroom gloves 

  • One of the key drivers of the better gross margin has been lower synthetic rubber costs. To recap, after a sharp spike in the synthetic rubber price in 1Q17 (+50% QoQ), it decreased rapidly in 2Q17 (c.-70% QoQ). Although the price increased 14% QoQ in 3Q17, it eased in Oct back to the 2Q17 level. 
  • Management expects the rubber price to remain low in 4Q17 because supply has returned to normal after the restart of a plant from periodic maintenance. Therefore, we look for gross margin to remain near the 27% level reported in 3Q17 (+1ppt YoY; +6.6ppt QoQ), which increased from the sale of higher margin/ASP cleanroom gloves.


Healthy demand for cleanroom & healthcare gloves 

  • Management highlighted that the demand for cleanroom gloves is expected to remain robust driven by increased demand for use in the production of flat-panel displays and from semiconductor contract manufacturers in Vietnam and China. 
  • In addition, its healthcare gloves continue to benefit from robust demand.


Temporary disruption resolved; expect better 4Q17 

  • A temporary disruption in Riverstone’s own power station caused an output loss of 70m gloves in 3Q17, which caused one shipment to fall short. Management expects to fill the 70m backlog in Oct. 
  • In addition, since most new capacity for the 1.4b gloves pa expansion only started in Sep 2017, we expect 4Q17 earnings to improve QoQ and YoY.


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/ 2017-11-09
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.050 Same 1.050



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