Riverstone Holdings - DBS Research 2018-05-09: Forex Weakness Priced In, Capacity To Drive Growth

Riverstone Holdings - DBS Vickers 2018-05-09: Forex Weakness Priced In, Capacity To Drive Growth RIVERSTONE HOLDINGS LIMITED SGX: AP4

Riverstone Holdings - Forex Weakness Priced In, Capacity To Drive Growth

  • Riverstone’s 1Q18 profits of RM31.1m within expectations as forex was the key earnings drag. 
  • Industry headwinds persist, but Riverstone can outperform peers as it ramps up on new cleanroom capacity from 2H18, which carries higher margins. 
  • Trading at attractive valuations, Riverstone could be a prime acquisition target given its enviable cleanroom portfolio. 
  • Reiterate BUY and Target Price of S$1.27. 

What’s New 

1Q18 results largely within expectations; forex was key earnings drag.

  • Riverstone’s 1Q18 sales held steady at RM209.8m (+2% y-o-y) but earnings fell 7.6% y-o-y to RM31.1m, mainly on negative forex impact and higher raw material costs. 
  • To recap, the group generates a surplus in USD as it typically receives over 85% of its revenues in USD but reports in RM and majority of the group’s expenses are in RM as well. While ASPs (in USD) for both healthcare and cleanroom glove types have stabilised over the past year as the supply-demand gap narrowed, the group’s 1Q performance was dragged after the USD weakened > 12% y-o-y.
  • The revised foreign worker levy and natural gas price hike in Malaysia which came into force in January also contributed to the lower gross margin of 22.3% vs 24.4%/25.2% in 4Q17/1Q17, respectively. Barring the forex impact, we believe that revenue and gross profit would have been c.10% and c.16% higher, which translates to a higher gross margin of c.23.6%. 
  • DBS Research estimates that the USD/MYR will appreciate to 4.20 by end-CY18F, vs 3.948 currently, which bodes well for export plays such as Riverstone. 

Persistent industry headwinds, but incoming cleanroom capacities to drive growth.

  • Similar to previous quarters, we continue to expect industry headwinds – fluctuations in USD/MYR, volatile raw material prices and operating costs – to remain a bane for the glove industry at large. All else equal, underpinned by a c.33% increase in cleanroom capacity to at least 2 bn gloves p.a. by end-2Q18 (with production likely to commence from 3Q onwards), Riverstone is set to see stronger growth ahead. 
  • Full contribution from these incoming cleanroom capacities will likely only come in from FY19F as the group ramps up on production progressively, which would provide an added boost to the group’s margins. 

Positive start to 2018 for Malaysian rubber glove industry.

  • In Apr 2018, the Malaysian Rubber Glove Manufacturers Association (MARGMA) – which represents c.90% of Malaysian glove manufacturers - expressed optimism over demand for rubber glove exports. 
  • Benefiting from a surge in end-demand, rubber glove shipments grew c.12% y-o-y for the first two months of 2018, which are seasonally weaker months for the glove manufacturing industry. Given the positive start, MARGMA expects rubber glove exports to achieve at least 10% growth to RM18 bn in 2018. 

Reiterating BUY call and Target Price of S$1.27; attractive valuations and acquisition target.

  • While 1Q18 earnings declined y-o-y, we believe the forex weakness has already been widely anticipated and thus priced in. As a market leader in niche Class 10 and Class 100 cleanroom gloves, we believe Riverstone can outperform peers amid industry headwinds as it ramps up on cleanroom glove capacity. 
  • While larger peers are currently trading above +1SD on average, Riverstone’s strengths remain under-appreciated as it continues to trade below its historical forward PE valuations. 
  • Underpinned by capacity growth at c.17% CAGR (vs larger peers’ average of c.15%) over FY17-19F and higher quality earnings growth supported by more resilient margins from the cleanroom segment, we believe that Riverstone deserves to at least trade at its historical average valuation of 16x FY19F PE (vs larger peers’ average of c.29x). 
  • Better-than-expected execution on these incoming capacities could spark a further re-rating to 18x FY19F PE (+1SD), in line with peers. 
  • Given current attractive valuations, hard-to-replicate cleanroom expertise and robust end-demand, Riverstone could also be an attractive acquisition target for the bigger boys with ambitions to break into the lucrative cleanroom business. 
  • Maintain BUY. 

Carmen TAY DBS Vickers | https://www.dbsvickers.com/ 2018-05-09
SGX Stock Analyst Report BUY Maintain BUY 1.270 Same 1.270