Riverstone Holdings - DBS Research 2019-02-27: Waiting For Re-Rating Catalyst

RIVERSTONE HOLDINGS LIMITED (SGX:AP4) | SGinvestors.io RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Riverstone Holdings - Waiting For Re-Rating Catalyst

  • Riverstone’s FY18 results in line; decline in ASP and change in product mix affected GP margins. 
  • Phase 5 expansion plans on track; planning for Phase 6. 
  • Currently stable raw material prices allow for better management of inventory. 
  • Maintain HOLD, Target Price S$1.19. 



Maintain HOLD; increasing higher-margin cleanroom production could spark re-rating of stock.

  • A global market leader in niche Class 10 and Class 100 cleanroom gloves, RIVERSTONE HOLDINGS LIMITED (SGX:AP4)’s edge in the high-tech cleanroom segment sets it apart from the bigger boys.
  • Given intense competition in the healthcare space, we see value in Riverstone’s hard-to-replicate and growing cleanroom business, which commands significantly higher margins. Near term, though raw material prices have stabilised, cost pressure from higher labour costs and competition from new players including those from China, could lead to margin pressure.
  • We maintain our HOLD call and a slightly higher Target Price of S$1.19. A better-than-expected execution on its incoming cleanroom capacities could spark a re-rating of the stock.


Riverstone’s FY18 performance is in line with expectations.

  • Decline in ASP and change in product mix affected GP margins. Increase in selling and distribution expenses was partly offset by forex gain. Phase 5 expansion plans are on track, and the group is planning for a Phase 6 plan.


Where We Differ:

  • Amidst uncertainties in the broader macro environment, Riverstone offers resilience backed by robust end-demand. While we have a HOLD call currently, interest in the stock should return upon an acceleration of growth in its cleanroom business, which will allow Riverstone to outperform peers.


Potential Catalysts:

  • Further capacity expansion, sustained increase in cleanroom glove mix (and thus margins), and inorganic growth.
  • Capacity expansion to underpin long-term growth. Riverstone plans to grow its glove production capacity by 1-1.5bn p.a., to 10.4bn gloves by end-2019. Backed by robust demand, we project earnings to grow at c.13% CAGR from RM129m in FY17 to RM167m by FY20F.


Valuation:

  • Maintain HOLD; Target Price tweaked to S$1.19, based on 16x FY19F PE.
  • Our Target Price of S$1.17 is based on 16x FY19F PE at c.45% discount to larger peers’ 29x.


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.


WHAT’S NEW - FY18 results in line


Decline in ASP and change in product mix affected GP margins.

  • Riverstone’s revenue for FY18 rose 12.7% to RM921.0m, driven by growing sales volume for both its cleanroom and healthcare glove segments. Gross profit decreased 3.9% y-o-y to RM190.0m while gross profit margin contracted 3.6 percentage points to 20.6%, mainly attributable to a decline in average selling prices of healthcare gloves as well as a change in product mix. There was a slight decrease in contribution for the higher-margin cleanroom gloves.
  • Apart from reflecting heightened competitive pressures for the healthcare glove segment, the downward price revision in ASP is in line with the c.40% fall in prices during the August to October 2018 period of butadiene, a key raw material used in the production of the group’s nitrile-based gloves.

Increase in selling and distribution expenses partly offset by forex gain; labour costs remain high.

  • Selling and distribution expenses saw a 5.8% increase, in line with Riverstone’s plans to expand its footprint in other geographies, such as the US to capture growing demand. Making up approximately 30% of global demand, the US is the world’s largest medical glove consumer and remains a key growth driver for Riverstone.
  • This was partly offset by a forex gain of RM1.5m, vs forex loss of RM12.9m in FY17. With the majority of its revenue denominated in USD, and costs mainly in RM, Riverstone is a beneficiary of the strengthening USD.
  • Labour cost, which is the biggest cost component and accounts for about 15% of total costs, is expected to remain high, partly due to the minimum wage imposed in Malaysia.
  • Overall, Riverstone’s FY18 net profit of RM129.7m was flat y-o-y, in line with our expectations.
  • A final DPS of 5.7 sen has been declared, bringing Riverstone’s full-year DPS to 7 sen, or payout ratio of 40%, similar to FY17.

Expansion plans on track.

  • Phase 5 expansion plans in Taiping, Perak, Malaysia is completed, bringing total production capacity to 9bn pieces of gloves per annum. Riverstone targets to increase production to 10.4bn by end of 2019, in Phase 6 of its expansion plans.
  • Riverstone has also acquired approximately 14.64 acres of land in Taiping for future expansion in production capacity. Utilisation rate remains high at about 92%, despite the capacity expansion.

Volatility in raw material prices cuts both ways; stable prices the most ideal environment.

  • Butadiene price has slumped on the back of US-China trade tensions, falling by nearly 40% during the August to October 2018 period. This affects ASP, especially for the healthcare glove segment as most of the cost savings are passed on to customers.
  • On the inventory front, lower raw material prices would allow the group to lock in more inventory at a lower cost, though there would still be a one-to two-month lag before the old stock is cleared.
  • Butadiene price has since stabilised at around US$1,100 per metric tonne, which is the most ideal environment for Riverstone, allowing a more manageable inventory environment.


Maintain HOLD; Target Price S$1.19.

  • We project a 22% growth in earnings for FY19F and a 6% growth in FY20F, given a more stable raw material price environment. Our Target Price of S$1.19 is based on an unchanged valuation multiple of 16x FY19F PE (similar to its historical average forward PE).
  • Maintain HOLD.
  • A better-than-expected execution on Riverstone’s incoming cleanroom capacities could spark a re-rating to 18x FY19F PE (+1SD), in line with larger peers.





Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-02-27
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.19 UP 1.170



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