Riverstone Holdings - CIMB Research 2016-05-06: Further margin compression a key risk

Riverstone Holdings - CIMB Research 2016-05-09: Further margin compression a key risk RIVERSTONE HOLDINGS LIMITED AP4.SI 

Riverstone Holdings - Further margin compression a key risk 

  • 1Q16 core net profit slightly below, at 20%/19% of our/consensus full-year forecast. 
  • 1Q16 net profit flat yoy despite sales increase of 17%. 
  • GPM dipped 2.5% pts yoy due to change in product mix and adverse FX impact. 
  • Continued capacity expansion should support sales growth; but impact on earnings would be partly offset by the challenging GPM outlook. 
  • Downgrade to Reduce, with a lower TP of S$0.91 (still pegged to peer average of 16.4x CY17F core P/E). 

1Q16 weaker than expected 

  • Riverstone’s 1Q16 core net profit came in slightly below our expectation, at 20% of our full-year forecast. 1Q16 net profit was largely flat yoy, although sales increased 17% on the back of a 24% increase in production capacity (from 4.2bn pieces in 1Q15 to 5.2bn in 1Q16). 
  • GPM dipped 2.5% pts yoy to 29.1% in 1Q16 (1Q15: 31.6%, 4Q15: 31.3%). 

Decline in sales volume of high-margin cleanroom gloves 

  • One key reason for the dip in GPM is the c.30% yoy drop in the sales volume of cleanroom gloves. 
  • As a market leader in the niche cleanroom segment, Riverstone has always been able to command a GPM of 35-40% for its cleanroom gloves, much higher than the 20-25% GPM for the more generic healthcare products. 
  • Cleanroom gloves formed only 18% of Riverstone’s 1Q16 total sales volume, versus c.30% in 1Q15. 
  • Management expects the demand for cleanroom gloves to pick up only in 2H16. 

Downward pressure on ASP of healthcare products 

  • Besides the slower cleanroom gloves sales, Riverstone’s healthcare segment continued to face downward ASP pressure due to stiff competition. Its healthcare glove ASP dropped 3-5% qoq in 1Q16, resulting in a lower healthcare GPM of 22% (4Q15: 26%). 
  • We think the healthcare GPM would revert to its long-term norm of 15-20% eventually, catalysed by intensifying competition as major Malaysian glove producers aggressively expand their capacities. 

FX no longer a help 

  • Riverstone’s strong earnings expansion in FY15 was helped by the then strengthening US$ against the ringgit (70-80% of group sales denominated in US$ vs. 40-50% of production cost). The FX worked against Riverstone in 1Q16 as the US$ weakened c.9% against the ringgit over the quarter. 
  • With US$:MYR currently stablising and hovering at 4.0 level, we expect Riverstone to find limited help from FX going forward. 

Expansion progressing well, further GPM compression a key risk 

  • We applaud management’s strong execution track record. Even as Riverstone expands its capacity at a remarkable speed (and capacity will be further boosted by another 1bn pieces in 2H16), it has managed to maintain utilisation at an optimal rate. 
  • Having said that, we think further GPM compression is a key risk ahead. To reflect this, we cut our FY16-18F EPS by 14-15%. 
  • Take profit and revisit Riverstone after GPM stablises. 

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-05-06
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.91 Down 1.07