SINGAPORE (Aug 8): DBS is maintaining its “buy” recommendation on Riverstone Holdings as the research house believes the group can outperform its peers as it ramps up on its incoming cleanroom glove capacities.
However, DBS has lowered the target price to $1.25, on lower gross margin assumptions.
This follows the group’s announcement of its 2Q18 earnings, which saw a 23.9% increase to RM33.6 million ($11.2 million), compared to RM27.1 million in 2Q17.
This brings 1H18 earnings to RM64.6 million, 6.5% higher than RM60.7 million in 1H17.
Revenue for the quarter saw a slight 0.5% increase to RM214.2 million from RM213.2 million last year, due to the strengthening MYR against USD despite higher sales volume.
As cost of sales dropped 2.1% y-o-y to RM166.0 million, 2Q18 gross profit came in at RM48.3 million, 10.6% higher than RM43.7 million a year ago.
Other operating expenses dropped by 86.7% to RM0.46 million compared to RM3.52 million in the previous year.
In a Wednesday report, analyst Carmen Tay says, “We have lowered our gross margin assumptions accordingly, resulting in a 7%/3% earnings cut for FY18F/19F respectively.”
Earlier in April, the Malaysian Rubber Glove Manufacturers Association (MARGMA) – which represents about 90% of Malaysian glove manufacturers, predicted that rubber glove exports would achieve at least 10% growth to RM18 billion for 2018.
“We believe that export figures could surprise on the upside if US tariffs on Chinese glove exports were to materialise – mainly on substitution effects as the cost differential between Chinese (predominantly Vinyl gloves) and Malaysian (predominantly natural rubber and nitrile gloves) gloves narrow,” says Tay.
On the other hand, given currently attractive valuations, hard-to-replicate cleanroom expertise and robust end-demand, the analyst sees Riverstone as an attractive acquisition target for manufacturers with ambitions to break into the lucrative cleanroom business.
As at 11.05am, shares in Riverstone Holdings are trading flat at $1.10 or 17.0 times FY18 earnings with a dividend yield of 2.4%.
