May 14, 2019

1Q19 revenue grew 14.6% on the back of an enlarged annual glove capacity of 9bn compared to previous year. However, despite that, net profit of RSTON declined 2.8% yoy (-8.2% qoq) to RM30.2m, which we deem slightly disappointing at 21.3%/20.7% of our/consensus’ FY19F forecasts. The decline was mainly due to a drop in ASPs for healthcare gloves and higher taxation as a result of higher profits from subsidiaries that do not benefit from tax incentives.

EBITDA margins have largely remained stable in the 19.2-19.8% range in the past three quarters, despite sliding to 19.5% for the quarter, from 21.7% a year ago. The yoy drop in margin resulted from lower ASP of healthcare gloves to reflect the lower price of butadiene, a key raw material, and possibly from slower sales growth in the higher margin cleanroom gloves, in our view.

Phase 6 expansion is on track to increase its annual production capacity by another 1.4bn pieces or 15.6%, which will bring it up to 10.4bn by end-2019. Apart from lower raw material prices, the recent strengthening of the US$ against RM since Mar 19 could also work in RSTON’s favour, if the trend continues. This could potentially help to lift operating margins which could put RSTON back on an earnings growth path in 2H19. We therefore leave our FY19-21F EPS forecasts unchanged.

Based on 16.5x FY20F P/E, a 19% discount to its Malaysian peers’ average of 20.1x. At 13.7x FY20F P/E which represents a 32% discount to Malaysian peers, we deem RSTON’s valuation to be undemanding. Re-rating catalysts are margin uplift that could result from stronger sales growth in cleanroom gloves. Key risks include sharp increases in raw material costs and intensified competition in the nitrile glove segment. We maintain our Add call on RSTON with an unchanged TP of S$1.22 – CGS CIMB

Riverstone Holdings closed at: S$ 0.98