Riverstone Holdings - CIMB Research 2016-11-10: Expect a stronger 4Q

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - Expect a stronger 4Q

9M16 core net profit slightly below our expectations, at 68% of our full-year forecast.
Sales rose 11% yoy in 3Q16 on higher capacity, but growth did not flow down to bottomline due to 5.8% pts GPM compression. Overall GPM picked up slightly qoq.
Management expects cleanroom gloves sales to resume growth from 4Q16.
Phase III expansion on track; all six production lines to come on stream by endFY16.

Maintain Hold, with target price raised slightly to S$0.91, as we roll over our valuation, pegging it to CY18F P/E of 16.3x (Malaysian peer average).

Riverstone’s 3Q16 core net profit came in slightly below our expectations, at 24% of our full-year forecast (9M16 at 68%).
Sales rose 11% yoy to RM161m in 3Q16 (3Q15: RM151m) due to the partial contribution of phase III capacity output. However, the sales growth was more than offset by a 5.8% pts yoy drop in GPM, resulting in lower gross profit of RM43.6m (3Q15: RM48m).
Excluding a net FX gain of RM0.5m, core net profit fell 4.4% yoy to RM4.0m in 3Q16 (3Q15: RM4.8m)

The 5.8% pts yoy drop in GPM (3Q16: 26.1% vs 3Q15: 31.9%) was a result of
1. a severe GPM compression for healthcare gloves (3Q16: 18% vs. 3Q15: 25%) due to the stiff competition in this segment, and
2. shift in product mix -- 3Q16 overall sales growth (11% yoy) was driven by lower-margin healthcare gloves; the sales of higher-margin cleanroom gloves remained largely flat yoy.
On the qoq basis, group GPM saw a slight pick-up of 1.7% pts (2Q16: 24.4%), thanks to the strengthened US$ over the quarter.

After a much subdued 1H16 due to the lacklustre demand from the hard disk drive sector, sales of cleanroom gloves gained momentum, with a double-digit qoq growth in 3Q16.
Management expects the qoq growth in cleanroom sales to sustain into 4Q, driven by demand from the automotive and pharmaceutical sectors.
Management guided for 10% yoy growth p.a. in cleanroom gloves sales in the medium term.

Riverstone’s phase III capacity expansion remains on track. 3Q16 benefited from the partial contribution of the three single lines. The remaining three double lines are slated to come on stream by end-FY16. Upon completion, phase III will have an annual capacity of 1bn pieces, boosting the group’s total production capacity to 6.2bn pieces p.a.
According to management, phase III capacity has been fully taken up by new orders, including new customers from US and improving demand from Europe.

We cut our FY16F core EPS by 4.7% to reflect the weak 3Q16 results, but maintain our FY17-18 forecasts in view of the stabilising GPM for healthcare gloves (thanks to strengthened US$) and expected growth in cleanroom gloves sales.
We maintain our Hold rating on Riverstone, with a slightly higher target price of S$0.91 after rolling over our valuation to base on CY18F P/E of 16.3x (peer average).
Upside surprise from cleanroom gloves sales could be a key re-rating catalyst.
Stiff competition is a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-10

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.910 Same 0.910