August 8, 2017

Riverstone Holdings’ 2Q17 revenue grew 36.1% yoy while net profit fell by a marginal 0.8% yoy to RM27.1m. Gross profit margin fell to 20.5% as production costs (labour and fuel costs) rose and raw material prices were also higher. Operationally, Riverstone continues to keep a tight lid on operating costs; selling and distribution as well as general and administrative costs were lower yoy. 1H17 net profit accounted for 44% of our full-year forecast.

The balance sheet remains strong with the company in a net cash position of RM85.3m (2Q16: RM98.9m) as at end-Jun 17. During the quarter, Riverstone generated RM37.6m in cash from operations. The strong balance sheet, healthy operating cash flow and the flexibility of utilising more external debt provides the Group ample ammunition for future expansion, in our view.

Riverstone’s capacity expansion is being driven by customer demand. In the cleanroom space, demand remains strong from mobile tablet customers. In the healthcare space, management noted that gloves are getting more affordable and creating new sources of demand apart from the traditional heavy users in the healthcare space. Riverstone’s revised capacity expansion plan is: end-FY17 – 7.6bn gloves (previously 7.2bn); endFY18 – 9.0bn (previously 8.6bn); and end-FY19 – 10.4bn (previously 10.0bn).

We lift our FY17-19F EPS by 8.4-19.0% to factor in the new capacity expansion plan. Although management believes that gross margin could revert back to a range of 25-27% on a blended basis as the company starts to benefit from lower raw material prices, we have opted to be conservative and assumed approx. 24.0% gross profit margin over our forecast period. TP is raised to S$1.20 based on the FY18F sector average (excluding Hartalega) P/E of 16.3x. Maintain Add. Downside risk is higher production costs. –CIMB


Riverstone Holdings closed at: S$1.060