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Riverstone Holdings - Maybank Kim Eng 2016-08-15: Dragged by weak gross margin; expect mild recovery in 2H16

Riverstone Holdings (RSTON SP) - Maybank Kim Eng 2016-08-15:  Dragged by weak gross margin; RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) - Dragged by weak gross margin; expect mild recovery in 2H16


Results missed expectations; mild recovery in 2H16 

  • 2Q16 results were below our expectation: core earnings after FX adjustments fell 3% YoY and met 42% of our FY16E. Gross margin fell by 5.7/4.7 ppt YoY/QoQ, due to decline in ASP and weaker gross margin of healthcare gloves from FX fluctuations and rising competition. 
  • However, demand for healthcare gloves remains robust and management expects the cleanroom gloves to pick up in 2H16. 
  • Also, 19% capacity expansion remains on track. 
  • Maintain HOLD, but cut our FY16-18 EPS by 9-11% and TP by 5% to SGD0.92. We roll over our base year to FY17 and peg our TP to 16x, 1SD above its three-year mean.


Mixed performance for healthcare gloves 

  • Gross margin for healthcare gloves has fallen notably, to 17% in 2Q16 from 22% in 1Q16, due to FX fluctuations and rising competition from additional supply in the industry. ASP has also fallen by 5% QoQ. 
  • On the other hand, demand for healthcare gloves remains robust and production remains at full utilisation rate. Management expects the worst to be over for ASP and margin compression, as other players have slowed down expansion. 
  • Future orders for its healthcare gloves remain healthy. Also, our FX team expects the USD/MYR to stabilise this year at 4.00 level, following the correction in 2Q16.


Expect recovery for cleanroom gloves 

  • Consistent with management’s expectations in 1Q16, cleanroom glove volume was flat QoQ due to lacklustre demand from the Hard disk drive and flat panel display customers. 
  • For 2H16, management expects demand to pick up, based on customers’ forecast.


Capacity expansion on track; customers secured 

  • Phase 3 expansion, which will add 19% new capacity, is on track. Two lines have started production while the remaining four lines will start in Aug – Nov. Orders have been secured for all the capacity. 
  • Phase 4 expansion is also on track; it is expected to be completed in Aug 2017.




John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-15
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 0.92 Down 0.970


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