Riverstone Holdings - DBS Research 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; 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.

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%.

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).

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