Riverstone Holdings - Maybank Kim Eng 2016-05-06: Weaker cleanroom segment, expansion on track

Riverstone Holdings - Maybank Kim Eng 2016-05-06: Weaker cleanroom segment, expansion on track RIVERSTONE HOLDINGS LIMITED AP4.SI 

Riverstone Holdings (RSTON SP) - Weaker cleanroom segment, expansion on track 

Results in line, key cleanroom segment deteriorated 

  • 1Q16 results were in line with expectations; core earnings after FX adjustments rose 20% YoY and met 21% of our FY16E. 
  • Gross margin fell by 2.5/2.2 ppt YoY/QoQ, due to 30% volume decline of the higher ASP and margin cleanroom glove and ASP decline of 3-5% for healthcare gloves. 
  • Cleanroom glove demand is expected to remain subdued in 2Q16, due to reduced demand from HDD and flat panel display customers. 
  • Demand should pick up in 2H16, based on customers’ forecast. 

Healthcare sector still growing fast 

  • Countering the slowdown of cleanroom glove, healthcare glove segment is gaining good traction among new and existing customers for its new capacity. 
  • Utilisation rate has reached its optimum capacity of > 90% in Mar 2016, from 85% in Jan and Feb 2016. As a result, Riverstone has to turn down excess orders. 
  • Management is optimistic on its expansion in the North American market despite intensifying industry competition. Revenue from this market has quadrupled to MYR24m in 1Q16. 

Expansion on track, exploring new product 

  • Phase 3 expansion, which will add another 19% to capacity, will commence production in Jul 2016 and reach full production in Nov. 
  • In addition, Riverstone has launched a new product, longer length glove. The product is gaining traction and management targets to produce more when its new production lines are ready. 

Weak cleanroom & ASP in 2Q16, downgrade to HOLD 

  • Weaker cleanroom gloves volume and healthcare gloves ASP should persist into 2Q16, before recovering in 2H16. 
  • We trim our FY16-18E EPS by 7-8% after reducing the cleanroom gloves volume by 20%, as we expect a 9% decline in volume, down from 9% increase previously. 
  • Also, we reduce our target P/E to 17x, down from 19x, still at 10% of the reduced target P/E of our Malaysian listed peers. After the adjustments, our TP is reduced to SGD0.97, down from SGD1.18
  • We downgrade the stock to HOLD.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-06
Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 0.97 Down 1.18