Riverstone Holdings (RSTON SP) - DBS Research 2017-11-09: Firm Earnings Recovery In 3Q17 Despite Temporary Hiccup

Riverstone Holdings (RSTON SP) - DBS Vickers 2017-11-09: Firm Earnings Recovery In 3Q17 Despite Temporary Hiccup RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) - Firm Earnings Recovery In 3Q17 Despite Temporary Hiccup

  • Riverstone Holdings' earnings recovered to RM34.3m (+26.8% q-o-q) in 3Q17 vs RM27.1m in 2Q17 – in line with expectations.
  • Operational hiccup resulted in a temporary decline in output in 3Q but has since been resolved, setting Riverstone up for a stronger 4Q.
  • Waiting for a clearer sign of a sustained uptick in sale of cleanroom gloves, which would enhance margins and boost earnings growth.
  • Maintain HOLD with TP of S$1.09. 

What’s New 

3Q17 profits of RM34.3m in line with expectations.

  • Riverstone’s earnings recovered from RM27.1m in 2Q17 to RM34.3m (+26.8% q-o-q) in 3Q17. The moderation in Butadiene prices (which weighed substantially on 2Q performance) and an improved product mix (in favour of higher-margin cleanroom gloves) were key factors.
  • Overall, 9M17 earnings of RM95.1m were in line, representing c.70% of our FY17F forecast (similar to FY16).

Revenue declined as production activities were hampered by a temporary power outage at its Taiping facility, but should be more than compensated for in 4Q. 

  • Revenue declined by nearly 12% q-o-q to RM187.8m on a myriad of factors (including ASP declines pegged to lower raw material costs), but was chiefly due to a decline in production output following a power supply outage at its Taiping plant, which has since been resolved. We understand that contingency plans are already in place to prevent a repeat of similar incidents.
  • The impact was further magnified at the top line as shipments for several lower-margin glove types were delayed after falling short of standing instructions for a minimum shipment quantity, and will likely be recognised in 4Q instead. 
  • Coupled with the progressive commissioning of new dipping lines from September onwards, we remain optimistic of a stronger 4Q17 (vs 3Q).

Margin improvement due to several factors. 

  • Margins improved on a sequential basis – mostly due to the lower base effect as 2Q margins were substantially hit by higher raw material costs - which were in fact higher compared to 1Q17. While lower effective tax rates were also a factor, we believe the steady margin improvement vs 1Q could be a possible reflection of Riverstone’s progress in growing new cleanroom glove accounts.
  • Industry conditions little changed since last update. Volatility in raw material prices, rising production costs and competitive situation – particularly in the healthcare segment, remain key challenges for the group.

On track for higher production capacity of 7.6bn gloves p.a. by end-2017. 

  • Phase 4 of Riverstone’s multi-year expansion plan in Taiping is currently underway, which should grow the group’s annual production capacity to at least 7.6bn gloves by end-2017.
  • Beyond FY17F, the company plans to grow production capacity further to 10.4bn by end-2019, underpinning longer-term growth.

Maintain HOLD with TP of S$1.09. 

  • With results in line, we maintain our HOLD call with a TP of S$1.09. 
  • We see current valuations of 18x FY17 PE as fair against projected EPS CAGR of 10% over FY16-19F.
  • A sustained improvement in mix towards cleanroom gloves would be positive for margins, and help grow the company’s earnings quicker.

Carmen TAY DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-11-09
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.090 Same 1.090