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.

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.

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.

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.

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.

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