We expect Riverstone to deliver stellar 3Q results with net income surging 90% YoY and 13% QoQ on the back of favourable forex movements (the USD strengthening against the MYR). Reiterate BUY with a higher SGD2.25 TP (13% upside). Most notably, the cleanroom business is poised to enjoy the full benefit of the MYR increment in ASP, thanks to its customers who are less price sensitive.
■ Expecting stellar 3Q results
Due to better-than-expected forex movements (the MYR weakening further against the USD), we now expect Riverstone to deliver stellar 3Q performance with net income surging 90% YoY and 13% QoQ to MYR30.6m. We also lift our full-year earnings estimates for FY15 and FY16 by 7.3% and 10.2%, respectively. Our new TP of SGD2.25 (from SGD2.06) is based on DCFE valuation (CoE: 8.0%, TG: 2%).
■ Cleanroom segment enjoys full benefit of forex movements
What really sets Riverstone apart from its Malaysian healthcare glove original equipment manufacturer (OEM) peers is its niche cleanroom business. While the general healthcare business is experiencing falling ASPs in USD terms (ASPs still up in MYR terms), management shared that its cleanroom business has managed to hold its ASP in USD terms, allowing it to enjoy the full benefit of the strengthening USD.
This is attributable to the fact that:
i) Riverstone sells cleanroom gloves (it also owns the brand) directly to end-customers, and
ii) cleanroom customers are less price sensitive compared to healthcare clients.
For instance, a pair of cleanroom gloves represents only a tiny portion of the cost of goods sold (COGS) of a hard disk drive, whereas a pair of healthcare gloves is an end-product for customers to sell on its own (100% COGS).
■ Expansion on track with newly-added capacity fully taken
Our recent check with management shows that Phase II expansion of one billion pieces per year of additional capacity has been fully taken up. As such, management has decided to proceed with Phase III expansion (one billion pieces per year). The factory building is due to be completed in Mar 2016 and production lines should be ready for production in 3Q16. (Read Report)
Source : RHB Research