Riverstone Holdings - DBS Research 2016-08-15: Headwinds persist in 2Q

Riverstone Holdings  - DBS Vickers 2016-08-15: Headwinds persist in 2Q RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - Headwinds persist in 2Q

  • As cautioned previously, earnings remained lacklustre in 2Q (+0.5% q-o-q to RM27.3m) – slightly below expectations as gross margins for healthcare gloves contracted 5ppt q-o-q.
  • Declared interim dividend of 1.3 sen.
  • Likely to see stronger 2H on better demand for higher-margin products and capacity increases.

Maintain HOLD with lower TP of S$0.96 

  • Maintain HOLD; TP lowered to S$0.96 as we expect FY16F earnings to remain largely flat on unfavourable mix shift and persistent headwinds. 
  • With the reversal of USD/MYR trends and heightened volatility in raw material prices, the tailwinds of 2015 – which led to an exceptional year for Riverstone (and the glove industry at large), now serve as headwinds to the company’s near-term prospects. 
  • Coupled with Riverstone’s unfavourable mix shift towards a higher proportion of lower margin healthcare gloves (as opposed to higher-margin cleanroom gloves), we expect earnings to decline by a modest 4.2% y-o-y to RM124.5m for FY16F.

Revise earnings estimates for FY16F/17F slightly downward.

  • Post 2Q results, given persistent industry headwinds (fluctuation in raw material prices and foreign currency rates), we reduce FY16F/17F earnings slightly by 3.9%/2.6%, mainly as we lower gross margin assumptions for healthcare gloves from 21.5%/20.5% to 19%/18.5%.

Capacity expansion to underpin long-term growth... 

  • Riverstone plans to double its annual capacity from 4.2bn in 2014 to at least 8.2bn gloves by 2018 to support growth in both its cleanroom and healthcare glove segments. 
  • Phase 3 expansion plans are on track, and the gradual commissioning of new production lines from July 2016 onwards should grow Riverstone’s annual production capacity by 19.2% y-o-y to 6.2bn by end-FY16. With strong expected demand, especially in the healthcare segment, earnings could nearly double from RM71m in FY14 to RM138m by FY17F. 
  • Separately, while some peers are scaling back on expansion plans, we note that Riverstone’s additional capacity of 1bn p.a. by end-2016 has already been fully committed – mainly from its new markets of US and Japan. We are thus of the belief that the company could potentially accelerate expansion plans to leverage on the strong demand.


  • Maintain HOLD with lower TP of S$0.96. 
  • After reducing FY16F/17F earnings by 3.9%/2.6% as we lower gross margin assumptions for healthcare gloves from 21.5%/20.5% to 19%/18.5%, we arrive at a lower TP of S$0.96 (based on 16x blended FY16/17F PE, or a c.20% discount to larger peers).

Key Risks to Our View

  • Global economic slowdown. While margins for cleanroom gloves tend to be resilient, demand for these gloves – which makes up c.45% of 1Q16 revenue – could be threatened in the event of a slowdown in the global economy.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-08-15
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.96 Down 1.000