Riverstone Holdings - CGS-CIMB Research 2019-08-08: A Clean Bill Of Health For 2H19F


Riverstone Holdings - A Clean Bill Of Health For 2H19F

  • RIVERSTONE (SGX:AP4)’s 1H19 results disappointed slightly, with net profit of RM62.7m at 44%/46% of our and Bloomberg consensus full-year estimates.
  • Nevertheless, we expect earnings recovery in 2H19F, with cleanroom gloves demand picking up and easing competition in healthcare gloves segment.
  • We resume coverage on Riverstone with an ADD call and Target Price of S$1.17, based on 17.0x FY20F P/E.

RSTON’s 2Q19 results were a slight disappointment

  • Riverstone's 2Q19 revenue grew 11.9% y-o-y, driven by an uptick in demand for both cleanroom and healthcare gloves, although healthcare gloves’ ASP trended lower due to lower raw material costs. GPM contracted 2.4% pts y-o-y due to a shift in product mix and lower ASP; this resulted in a net profit decline of 3.1% y-o-y.
  • We deem 1H19 results slightly below expectations, with net profit coming in at 44%/46% of our/Bloomberg consensus full-year forecasts.
  • Although Riverstone declared a higher interim DPS of RM1.55 (+15% y-o-y), management clarified that this was to offset the lower FY18 final dividend payout. We forecast dividend payout ratio to remain at 40% in FY19F.

Demand for cleanroom gloves picking up

  • A positive surprise during the analyst briefing was an acceleration in sales growth of cleanroom gloves (25% revenue contribution; 53% GP contribution in 2Q19) to 15-20% y-o-y since Jun, mainly driven by stronger demand from non-HDD manufacturers (FY18: single-digit sales growth).
  • We also expect cleanroom gloves’ GPM to improve in 3Q19, as prices of key raw materials including butadiene (68% of COGS) and acrylonitrile (27% of COGS) fell 34.3% and 17.1% y-o-y respectively in July.

Easing competition for healthcare gloves segment

  • Healthcare glove segment could also post stronger results in 2H19, in our view, helped by
    1. improved supply-demand dynamics from better absorption of new supply in the Malaysian glove industry, and
    2. tailwinds from weaker ringgit vs. US$.
  • Management noted that pricing competition has eased, and Riverstone has managed to pass half of the additional costs from Jul’s gas tariff hike to customers.
  • Supported by the easier comparison base of 2H18 (which was plagued by volatile raw material price movements and labour shortage), we forecast Riverstone’s GPM to expand by 1.2% pts y-o-y, and net profit to grow 18.2% y-o-y in 2H19F (1H19: -3.0% y-o-y).

Resume coverage with ADD rating and Target Price of S$1.17

  • With the expected earnings recovery in 2H19F, we resume coverage with an ADD rating. Our Target Price of S$1.17 is pegged to 17.0x CY20F P/E (Riverstone’s 5-year average historical P/E).
  • At 13.0x FY20F P/E, which represents a 31% discount to Malaysian peers, we deem Riverstone’s valuation undemanding.
  • Potential re-rating catalysts include stronger-than-expected volume growth of cleanroom gloves.
  • Key downside risks include pricing competition leading to a fall in healthcare gloves’ margins.

ONG Khang Chuen CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-08
SGX Stock Analyst Report ADD MAINTAIN ADD 1.17 DOWN 1.220