Riverstone Holdings - DBS Research 2019-11-08: Rising Orders & Margin Improvement

RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Riverstone Holdings - Rising Orders & Margin Improvement

Riverstone's 3Q19 results in line; led by higher demand and improvement in margins.
Increasing orders from new and existing customers; rising inventory level.
Focusing on cleanroom gloves and specialty products for the healthcare gloves segment to improve margins.
Maintain BUY and Target Price of S$1.16.

We are optimistic that RIVERSTONE HOLDINGS (SGX:AP4) can continue to generate higher volumes for both the Healthcare Gloves and the high-margin Cleanroom Gloves. This should lead to a further improvement in margins. Butadiene prices, the key raw material for nitrile glove, have stabilised, which is the most ideal environment for Riverstone.
At current price-to-earnings (PE) of 16.2x and 15x on FY19F and FY20F earnings respectively, Riverstone is trading at its historical low forward PE, which is about -1SD (standard deviation).
Compared to its peers, it is trading at about 30% discount. This is unjustifiable, in our view, given the expected shift towards higher-margin Cleanroom Gloves and a stabilising raw material environment.
We see value in Riverstone’s hard-to-replicate cleanroom business that sets it apart from its competitors. Glove makers are generally regarded as defensive and relatively more stable given their resilient demand.

Riverstone achieved RM251.3m revenue for 3Q19, +4.9% y-o-y, backed by rising orders for both Cleanroom Gloves and Healthcare Gloves segments. The volume for Cleanroom Gloves was up 10% y-o-y and a stronger 15% q-o-q. For the Healthcare Gloves segment, volume gained 15% y-o-y but was flat q-o-q. See Riverstone Holdings Announcements.
In terms of ASP, it was consistent both on a y-o-y and q-o-q basis for the Cleanroom Gloves segment but the Healthcare Gloves segment saw a c. 10% drop in ASP on a y-o-y basis, and stable on a q-o-q basis. Thus, there is an improvement in the higher-margin Cleanroom Gloves mix, which is positive for the group.

Gross profit rose 11.4% y-o-y to RM51.4m, on the back of the robust demand, and also improvement in margins.
Gross margin improved to 20.5% from 19.3%, as Riverstone has been making efforts to optimise its manufacturing processes. The shift to the higher-margin Cleanroom Gloves also helped to boost margins.
Net profit increased 10.9% y-o-y to RM35.6m. 3Q19 revenue and net profit account for 25% and 26% of our forecasts respectively, and 72% for both revenue and net profit on a 9-month basis.
Overall, results were in line as we are expecting a stronger 4Q19 on the back of the improvement in demand and margins.

Riverstone expects more orders ahead, stemming from an increase in order allocations from both new and existing customers, from both the Healthcare Gloves and Cleanroom Gloves segment. As such, inventory level as at end-September 2019 increased to RM100.7m, from RM83.6m as at end-December 2018.

Phase 6 expansion plans to raise production capacity up to 10.4bn pieces of gloves per annum is on track, with the gradual commissioning of the production lines up until the end of the year or into the first quarter of FY20.
With global demand for rubber gloves expected to increase by approximately 12.0% to 300bn gloves in 2019, the new lines coming on board will allow the group to capitalise on the burgeoning demand to drive growth in the coming years.

Driven by robust core business performance and efficient working capital management, Riverstone generated positive operating cash flows of RM47.0m for 3Q FY19. This contributed to a stronger balance sheet as at end-3Q19, as the group’s net cash position strengthened to RM111.7m, compared to RM77m as at end-4Q18.

Going forward, Riverstone would continue to focus on the higher-margin Cleanroom Gloves segment. For the more competitive Healthcare Gloves division, the focus would be on niche products, e.g. double colour or double gloves, that can command higher margins and to differentiate itself from the many players in this space.

Butadiene prices are stabilising, which is the most ideal environment for Riverstone. Butadiene prices have been fluctuating within a narrower band of between US$900/metric tonne and US$1,200/metric tonne YTD, since prices plunged 40% in 2H18 mainly due to the US-China trade tensions.

No change in earnings forecast, given the in-line results. Our Target Price is based on 20% discount to peers (17.4x) on FY20F earnings. See Riverstone Holdings Share Price; Riverstone Holdings Target Price.

We are optimistic that Riverstone can continue to shift its production towards the higher-margin Cleanroom Gloves.

Further capacity expansion, sustained increase in Cleanroom Gloves mix (and thus margins), higher ASP and inorganic growth are potential catalysts.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-11-08

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