Riverstone Holdings - CGS-CIMB Research 2019-11-08: Better Times Ahead


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 | https://www.cgs-cimb.com 2019-11-08
SGX Stock Analyst Report ADD MAINTAIN ADD 1.25 UP 1.170