Riverstone Holdings - CIMB Research 2017-05-05: Strong Demand Driving Faster Expansion

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - Strong Demand Driving Faster Expansion

1Q17 core net profit was ahead of our expectations, at 26% of our full-year forecast.
We expect a stronger 2H with another 1bn pieces p.a. capacity coming on stream.
Core net profit rose 17% yoy on the back of 39% yoy revenue growth, driven by stronger healthcare and cleanroom gloves sales, partly offset by lower GPM.

Management revised its capacity expansion plan, with total capacity slated to reach 10bn pieces p.a. by end-FY19, representing c.60% increase over end-FY16.
We raise FY17-19F core EPS by 10-14%.
Upgrade Riverstone from Hold to Add, with a higher TP of S$1.11, based on FY18F core P/E of 18.3x (pegged to the average of its 3 major Malaysian peers).

At 26% of our full-year forecast, Riverstone’s 1Q17 core net profit is deemed ahead of our expectations as we expect a stronger 2H with the phase IV expansion capacity of additional 1bn pieces p.a. slated to come on stream progressively in 2H17.
Reported net profit rose 24% yoy to RM33.6m in 1Q17 (1Q16: RM27.2m).
Excluding FX gains/(losses) and certain tax allowances which we treated as non-core in nature, group core net profit rose 17% yoy to RM29.4m in 1Q17 (1Q16: RM25.1m).

Group revenue rose 39% yoy to RM206m in 1Q17 (1Q16: RM148m) as
1. the additional 1bn pieces p.a. capacity (phase III) that started operations in 2H16 has been fully filled up by the increased demand for healthcare and cleanroom gloves, and
2. the gloves ASP rose yoy as Riverstone passed some of the higher raw material costs to its customers.
The impact of higher gloves sales on profitability was partly offset by the 3.5% pts GPM compression, due mainly to higher raw material costs in 1Q17.

Riverstone registered strong operating cashflow of RM40m in 1Q17 vs. RM13m in 1Q16, thanks to higher profitability as well as better trade receivables management.
Balance sheet remained strong, with a slight net cash position of RM60.5m as at end- 1Q17 (end-FY16: RM59.2m), forming c.3% of the group’s market cap. The strong balance sheet, healthy operating cashflow and the flexibility of utilising more external debt have provided the group ample ammunition for future expansion, in our view.

Management expects increasing demand for its cleanroom products from non-hard disk drive segments (i.e. mobile, tablet, LCD manufacturing industries). It also said that sales of both its cleanroom and healthcare gloves are gaining traction in the US and Japan markets.
To cater to the increasing demand, the group plans to grow its capacity more aggressively. Under the revised plan, the group’s total production capacity is slated to reach 10bn pieces p.a. by end-FY19, c.60% increase vs. 6.2bn pieces as at end-FY16.

We raise our FY17-19F core EPS by 10-14% to reflect the strong 1Q17 results as well as the anticipated faster expansion under the revised plan. Our forecasts translate to a 3-year core EPS CAGR of 17% in FY17-19F.
We upgrade Riverstone from Hold to Add, with a higher target price of S$1.11, based on FY18F core P/E of 18.3x (average of its Malaysian peers excluding outlier Supermax).
Organic earnings growth is a key re-rating catalyst, while stiff competition and unfavourable FX fluctuations are key risks.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-05-05

CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 1.11 Up 0.910