Riverstone Holdings - CGS-CIMB Research 2020-02-26: Robust Growth Ahead

RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Riverstone Holdings - Robust Growth Ahead

Riverstone Holdings (SGX:AP4)'s 4Q19 net profit of RM32m (-10% q-o-q, -3% y-o-y) was a slight miss, mainly due to higher tax expenses.
Riverstone should see a much stronger FY20F, with robust demand for both its healthcare and cleanroom gloves.

We forecast 20.6% EPS growth in FY20F (FY19: 0.6%). Reiterate ADD with an unchanged Target Price of S$1.30 (based on 5-year historical average P/E).

Riverstone reported 4Q19 net profit of RM32m (-10% q-o-q, -3% y-o-y). FY19 net profit came in at 96%/97% of our/Bloomberg consensus forecasts, a slight miss. The key drag was higher tax expense, due to lower reinvestment allowance as Riverstone delayed commissioning of its new production capacity from 2H19 to 1H20.
Nevertheless, core operations remained strong, in our view. Both GPM and OPM showed y-o-y expansion of 1.5% pts and 1.1% pts respectively in 4Q19 (reversing past four years' contraction trend), due to stronger sales of cleanroom gloves during the quarter.

Management is positive on FY20F outlook, with strong demand for both healthcare and cleanroom gloves. Management sees clear order visibility for healthcare gloves through July amid the Covid-19 outbreak. The cleanroom segment is also enjoying healthy demand from semiconductor and pharmaceutical sectors.
Riverstone is in the midst of commissioning new production lines (capacity +16% y-o-y), and gradually lifting production line speed to cope with the surge in demand. We forecast sales volume to grow 20% y-o-y in FY20F, with a stable product mix (volume split: 85% healthcare, 15% cleanroom).

We forecast GPM to expand 0.3% pt y-o-y to 20.4% in FY20F.
We believe the spike in global healthcare glove demand could lead to more favourable supply-demand dynamics in the healthcare glove sector, and translate into an increase in Riverstone’s healthcare segment margins in FY20F.
Cleanroom margins should also benefit from the lower raw material prices.
Overall, we forecast stronger FY20F EPS growth of 20.6% (FY19: 0.6%).

Reiterate ADD. We make no changes to our EPS forecasts. Our Target Price is kept at S$1.30, still based on 17.0x FY21F P/E (RSTON’s 5-year historical mean).
We believe valuation is attractive, as Riverstone is currently trading at a 47% discount to its Malaysian-listed peers (5-year average: 30%).
See Riverstone Holdings Share Price; Riverstone Holdings Target Price; Riverstone Holdings Analyst Reports; Riverstone Holdings Dividend History; Riverstone Holdings Announcements; Riverstone Holdings Latest News.
Potential re-rating catalysts include better pricing environment resulting in stronger margins; key downside risks include volatile raw material price or FX ovements.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-26

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