Riverstone Holdings - UOB Kay Hian 2016-05-09: 1Q16 ~ Muted Growth; Downgrade To HOLD

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) 1Q16: Muted Growth; Downgrade To HOLD

1Q16 net profit came in flat yoy, largely attributable to softer cleanroom glove demand as well as forex impact.
In view of the ongoing ASP pressure on healthcare gloves and tepid demand for cleanroom gloves, the short-term outlook is lacklustre and we have trimmed our 2016-18 net profit forecasts by up to 12%. Thus, we recommend investors HOLD through this challenging period.
Nevertheless, we are confident about Riverstone’s long-term prospects.

Downgrade to HOLD with a lower target price of S$0.98 (previously S$1.23). Entry price: S$0.88.

Riverstone reported flattish net profit growth of 0.6% yoy, to RM27.2m as of 1Q16, falling slightly below our expectations as earnings were impacted by higher raw material costs as well as a shift in product mix from higher margin cleanroom gloves.
Additionally, earnings were impacted by an unfavourable forex impact, where currency volatility reversed a net forex gain of RM1.9m in 1Q15 to a loss of RM6.5m for 1Q16.

There was a significant decrease in sales volume of higher margin cleanroom gloves in 1Q16 (c.30% yoy decline), which we believe is attributable to a slowdown in demand from the technology component-manufacturing sector such as tablet and mobile. As a result, there was a pronounced shift in product volume mix, with a lower proportion of higher margin cleanroom gloves in 1Q16 (cleanroom: 18%; healthcare: 82%) vs 1Q15 (cleanroom: 30%; healthcare: 70%).
Nevertheless, we expect a gradual pick-up in demand in 2H16 as component manufacturers for mobile and tablet sectors resume a ramp up of production targets and previously stalled projects.

While the ASP for cleanroom gloves remained largely unchanged, we note that healthcare gloves segment remained competitive, registering an ASP decrease of 3-5% qoq as of 1Q16. As a result, gross profit margin for healthcare gloves declined 4ppt qoq to c. 22% as of 1Q16.

On the production front, things appear to be on track, as Riverstone targets to complete its third phase of its Taiping Malaysia plant expansion by end-16. Following which, it would increase total production capacity by 1b to 6.2b gloves p.a..
We understand that the average utilisation rate was at about 87% due to a seasonally slower Jan-Feb period. Nevertheless, we note utilisation had gradually trended up closer to the end of March to 90%.

Geography-wise, management is positive about US-based healthcare consumers, with revenue from US-based customers having increased four-fold to RM24m as of 1Q16 compared with RM6m in 4Q15.
Coupled with expansion of production capacity, we expect continued sales growth from the North America region going forward.

Trim 2016-18 earnings forecasts by 8-12% to factor in decreasing ASP of healthcare gloves as well as softer demand for higher margin cleanroom gloves.

Downgrade to HOLD with a lower target price of $0.98 (previously $1.23), pegged at the sector 2017F PE of 15x to our 2017F EPS of 6.5 S cents.
Given the limited upside of 4% to our revised target price, we downgrade the stock to HOLD.
Our entry price is S$0.88.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-09

UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 0.98 Down 1.23