RIVERSTONE HOLDINGS LIMITED (SGX:AP4)
Riverstone Holdings - Better Times Ahead
- Riverstone's 3Q19 results disappointed slightly due to weaker topline growth. 9M19 net profit came in at 70%/72% of our/Bloomberg consensus full-year estimates.
- We expect sequentially stronger earnings ahead, with cleanroom gloves demand picking up and competition in the healthcare gloves segment easing.
- We deem the current valuation, at 40% discount to peers, as undemanding. Maintain ADD, with a higher Target Price of S$1.25 (17.0x CY21F P/E).
RSTON’s 3Q19 results were a slight disappointment
- RIVERSTONE (SGX:AP4)'s 3Q19 revenue grew 4.9% y-o-y, weaker than we expected, as lower healthcare glove ASP (-c.10% y-o-y) offset volume growth. GPM expanded 1.2% pts y-o-y due to a shift in product mix and enhanced production efficiency; this resulted in a net profit increase of 10.9% y-o-y. See Riverstone Holdings Announcements; Riverstone Holdings Latest News.
- We deem 9M19 results as slightly below expectations, with net profit coming in at 70%/72% of our/Bloomberg consensus full-year forecasts.
Focus on the reacceleration of cleanroom segment growth
- We believe investors should focus on the stronger sales growth of its cleanroom segment in 3Q19 (+15% q-o-q, +10% y-o-y). Management noted stronger demand for corrosive-resistant gloves from customers dealing with sensors, smartphones and tablets.
- Given the higher margin profile of the segment (30% revenue; 52% GP contribution in 3Q19), a reacceleration of cleanroom revenue growth could drive further GPM expansion.
Sequentially stronger earnings ahead
- Management noted that pricing competition for healthcare gloves has also eased compared to 1H19, and Riverstone is a beneficiary of the global supply chain shift as customers relocating to Southeast Asian countries place more orders.
- Riverstone’s utilisation rate in 3Q19 remained healthy at c.90%. Given the easier comparison base of 2H18 (which was plagued by volatile raw material price movements and labour shortage), we forecast 4Q19F net profit of RM37.8m (+6.2% q-o-q, +14.8% y-o-y).
To target higher value, niche glove products
- We understand there is a slight delay to Riverstone’s upcoming 1.4bn capacity expansion (+15.6%) to 1Q20 (planned: end-FY19). Management is developing new products to target higher value markets in the non-cleanroom segment, including gloves for use in surgical, slaughterhouse and food processing applications.
Maintain ADD rating with higher Target Price of S$1.25
- Maintain ADD. We cut our FY19-21F EPS by 2.5-3.9% to factor in delays in its capacity expansion. Our Target Price rises to S$1.25 as we roll over our valuation to end-FY21F, still based on 17.0x P/E (Riverstone’s 5-year historical mean). See Riverstone Holdings Share Price; Riverstone Holdings Target Price; Riverstone Holdings Dividend History.
- We deem Riverstone’s current valuation, at a 40% discount to its Malaysian peers, as undemanding.
- Potential re-rating catalysts include stronger than-expected volume growth of cleanroom gloves.
- Key downside risks include intensifying pricing competition leading to a fall in healthcare gloves’ margins.
ONG Khang Chuen
CGS-CIMB Research
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https://www.cgs-cimb.com
2019-11-08
SGX Stock
Analyst Report
1.25
UP
1.170
