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