Riverstone Holdings - CIMB Research 2017-02-23: Smooth execution amid competitive landscape

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - Smooth execution amid competitive landscape

FY16 core net profit in line with expectations, at 100% of our full-year forecast.
Net profit fell 4.7% yoy due mainly to GPM contraction despite higher revenue.
Capacity expansion on track, with phase III fully taken up and phase IV due in 2H17.

Key near-term challenges include the lift in raw material price and competition.
Maintain Hold, with unchanged target price of S$0.91, pegged to CY18F P/E of 16.4x (Malaysia peer average); its FY16 DPS of 6.49 sen translates into 2.3% yield.

Reported net profit fell 4.7% yoy to RM120.4m in FY16 (FY15: RM126.5m). Excluding FX gains and tax benefits, core net profit declined 4% yoy to RM99.9m in FY16 (FY15: RM104m).
Group cash position (still zero debt) decreased to RM103m as at end-FY16 (FY15: RM129m), due mainly to capex for capacity expansion, partly offset by its healthy operating cashflow of RM119m.
Management proposed a final DPS of 5.19 sen, raising the full-year DPS to 6.49 sen, translating into 40% payout and FY16 yield of 2.3%.

Group topline rose 16.9% yoy to RM655m in FY16 (FY15: RM560.2m), on the back of higher production capacity (up 19% yoy to 6.2bn pieces p.a. as at end-FY16 vs. 5.2bn at end-FY15).
However, the positive impact of sales growth was fully negated by the 4.8% pts GPM compression (FY16 GPM: 26.4% vs. FY15: 31.2%), due to
1. different sales mix (higher contribution from lower-margin healthcare gloves vs. cleanroom) and
2. stiff competition.
As a result, group gross profit saw a slight decline of 1% yoy.

Management said sales of healthcare and cleanroom gloves continued gaining traction in the US and Japan markets (shipments to the US accounted for c.30% of group total production in FY16), driven by demand from existing and new customers.
With the additional 1bn pieces p.a. capacity of phase III fully taken up by the new orders, the group’s current capacity utilisation rate stands at an optimal 90%.

The group has commenced the construction works for its phase IV capacity expansion, which is scheduled to start commissioning in 2H17. Upon full completion by end-FY17, the phase IV capacity would raise the group’s total production capacity by another 1bn pieces p.a. to 7.2 bn.
Management believes that the group will have no difficulty in filling up the additional capacity, given that the group currently faces capacity shortage to satisfy existing customers’ orders.

Management sees the following near-term challenges:
1. the potential increase in production costs such as raw material, labour and fuel, and
2. stiff competition.
We caution that due to the competition, Riverstone may not be able to fully pass down the cost increase to its customers. This may continue weighing on group margins, as reflected by our lower GPM projection of 25.5% for FY17F (FY16: 26.4%).

We keep our Hold call and target price of S$0.91, pegged to its Malaysian peer average CY18F P/E of 16.4x.
Upside surprise in cleanroom gloves sales could be a key re-rating catalyst.
Possible further margin pressure from stiff competition is a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-02-23

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