Riverstone Holdings - CGS-CIMB 2018-05-10: Shifting The Costs Over Gradually

Riverstone Holdings - CGS-CIMB 2018-05-10: Shifting The Costs Over Gradually RIVERSTONE HOLDINGS LIMITED SGX: AP4

Riverstone Holdings - Shifting The Costs Over Gradually

  • We provide key updates following Riverstone’s 1Q18 results call on 10 May morning.
  • 1Q18 net profit came slightly below expectations at 21% of our full-year forecast and consensus. Historically Riverstone’s 1Q/1H results tend to be weaker.
  • Gross margin narrowed 2.9% pts to 22.3% in 1Q18 due to lower ASPs on ringgit terms. On US dollar terms, ASPs have improved y-o-y.
  • It is on track to start expanding production lines towards end-3Q18F, which will raise annual capacity from 7.6bn as at end-FY17 to 9.0bn gloves by end-FY18F.
  • We maintain our ADD call in view of growth recovery outlook with a target price of S$1.28, based on 16.7x CY19F P/E.

Higher volume growth supported increase in revenue

  • Riverstone’s 1Q18 revenue was in line with our expectations, forming 23% of our full-year estimate and consensus. Riverstone’s 1Q/1H results tend to be weaker in the year as capacity expansion typically commences in 2H. 
  • In terms of volume output, its healthcare and premium cleanroom gloves expanded 9% and 3% y-o-y respectively according to management. The split between healthcare and cleanroom gloves in terms of volume is about 80:20.

New customer acquisitions drove higher volume output

  • On its cleanroom gloves, sluggish volume growth was due to reduction in mobile and tablets orders undertaken by customers but was helped by new customer acquisitions (mostly component suppliers for LCD/LEDs and automotive sensors) in China and Vietnam. 
  • Management remains bullish on continued demand growth ahead and targets to achieve 10% y-o-y growth in gloves volume output amid favourable trend in shift towards halogen-free nitrile gloves away from PVC gloves.

Gross margin down mainly due to US$ weakening against ringgit

  • ASPs in US dollar terms have improved slightly (healthcare: c.5%; cleanroom: ASP largely maintained) as the group was able to pass on some of the increases in raw materials costs to customers in 1Q18. 
  • In terms of ringgit, ASPs have fallen due to weaker US$, coupled with additional c.RM0.7m in foreign worker levy that resulted in lower gross margin. 
  • Looking ahead, management expressed optimism of passing over the costs and raising ASPs gradually in the following quarters.

Expansion in production capacity on track to start in 2H18F

  • Riverstone expects to boost its current 7.6bn annual glove production capacity by another 1.4bn gloves this year, with the new production lines expected to commence production in Sep 18. 
  • Utilisation of its existing production capacity stands at c.90% and management believes new orders would quickly fill in to sustain its utilisation at current level with the expansion in capacity. 
  • The 80:20 split between healthcare and cleanroom gloves is likely to hold after expansion.

Maintain ADD with unchanged Target Price of S$1.28

  • We trim our FY18-20F EPS forecasts by 1.0-1.5% after adjusting for lower gross margin but higher USD/MYR exchange rate assumptions ahead. Riverstone’s share price is trading at 12.5x FY19F P/E, representing 24% discount to its peer average of 16.5x (ex-Hartalega). 
  • Our target price remains at S$1.28 based on 16.7x CY19 P/E, using MYR/SGD exchange rate of 2.95 (previously 2.97). Maintain ADD. 
  • Catalysts would come from better-than-expected gross margins. Key risks include increases in raw material costs.

Colin TAN CGS-CIMB | https://research.itradecimb.com/ 2018-05-10
SGX Stock Analyst Report ADD Maintain ADD 1.280 Same 1.280