Riverstone Holdings - DBS Research 2017-05-08: Expanding On Growth Ambitions

Riverstone Holdings - DBS Vickers 2017-05-08: Expanding On Growth Ambitions RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - Expanding On Growth Ambitions

  • 1Q17 profits hold up better than expected on improved cleanroom demand.
  • Ups guidance on capacity expansion plans to 10bn gloves by end-FY19F (vs 8.2bn by end-FY18F previously).
  • Takes on debt to fund expansion but remains in net cash position of RM122.7m (as at end-1Q17).
  • More positive on earnings outlook; upgrade to BUY with higher TP of S$1.07, based on FY18F earnings.

Upgrade to BUY as we raise TP to S$1.07; Earnings catalysed by strong cleanroom demand and new three-year expansion plan.

  • Riverstone surprised in 1Q17, as the uptick in cleanroom demand (+20% y-o-y – which carry higher margins, held up profits better than expected. 
  • With demand in the cleanroom segment mainly stemming from the semiconductor and mobile tablet sectors, we see Riverstone as an indirect beneficiary of the current semiconductor upcycle.

1Q17 profits hold up better than expected despite headwinds; ups guidance on capacity expansion plans 

  • Record-high quarterly sales in 1Q17, bottom line performance above expectations. Riverstone delivered record-high quarterly sales of RM205.7m (+12.4% q-o-q) on a combination of improved cleanroom demand (particularly from the semiconductor and mobile tablet sectors) and favourable ASP adjustments.
  • As a result, the group was able to sustain gross margins at the 25% level (vs 26.2% in the previous quarter) despite raw material prices surging to 5-year highs of c. US$1,300/metric tonne.

Momentum in cleanroom demand expected to continue.

  • During the quarter, the group’s cleanroom product continued to garner strong interest from both existing and new customers.
  • Ahead, we expect strong cleanroom order momentum to be sustained by higher manufacturing activity in the broader semiconductor and electronics space and substitution from PVC to nitrile gloves.

Expect fluctuations in ASPs but margins should stabilise at a higher level. 

  • Volatility in USD/MYR trends and raw material prices could lead to fluctuations in ASPs under the cost-plus mechanism. While the strong pullback in Butadiene prices in March could result in downward adjustments to ASPs in the subsequent quarters, we expect gross margins to stabilise at a higher level (than previously expected) on a higher cleanroom mix as margins for this segment are generally more defensible.

Company ups guidance on capacity expansion plans. 

  • In anticipation of strong demand for both its cleanroom and healthcare gloves, Riverstone announced that it will be accelerating its expansion plans.
  • From 2014, the group has been committed to growing capacity by 1bn p.a. to at least 8.2bn gloves p.a. by end- 2018. Under the new three-year expansion plan, we expect total glove production capacity to grow to 8.6bn pieces by end-2018 and 10bn pieces p.a. by end-2019.

Upgrade to BUY with a higher TP of S$1.07. 

  • Despite industry headwinds, we believe Riverstone’s edge in the high-tech cleanroom segment sets it apart from the bigger boys.
  • After rolling forward our earnings base to FY18F and raising our profit estimates by +8%/5% for FY17F/18F on 
    1. increase in total production capacity of 10bn pieces p.a. by end-2019 (+22% from earlier guidance of 8.2bn pieces p.a. by end- 2018, 
    2. higher cleanroom glove mix, and 
    3. higher margins, we arrive at a higher TP of S$1.07.

Key Risks to Our View: Global economic slowdown. 

  • While margins for cleanroom gloves tend to be resilient, demand for these gloves could be threatened in the event of a slowdown in the global economy.

Lee Keng LING CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-05-08
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 1.07 Up 0.970