SINGAPORE (May 14): CGS CIMB Securities is maintaining its “add” recommendation on Riverstone Holdings with a target price of $1.28.

The group on May 8 announced that its 1Q18 earnings have dropped by 7.6% to RM31.1 million ($10.5 million) from RM33.6 million in 1Q17.

Revenue was 2.0% higher at RM209.8 million compared to RM205.7 million last year. But gross profit for the quarter fell 9.5% y-o-y to RM46.9 million, as gross profit margin dropped by 2.9 percentage points to 22.3%.

<hr/><a href="https://www.theedgesingapore.com/riverstone-sees-76-drop-1q-earnings-105-mil-lower-margins">See: Riverstone sees 7.6% drop in 1Q earnings to $10.5 mil on lower margins</a><hr/>

In a Thursday report, analyst Colin Tan says that Riverstone’s 1Q/1H results generally tend to be weaker as capacity expansion typically commences in 2H.

In terms of volume ouput, its healthcare and premium cleanroom gloves expanded 9% and 3% y-o-y respectively according to management. The split between healthcare and cleanroom gloves in terms of volume is about 80:20.

The group saw sluggish volume growth in its cleanroom gloves, due to reduction in mobile and tablets orders undertaken by customers. But this was helped by new customer acquisitions (mostly component suppliers for LCD/LEDs and automotive sensors) in China and Vietnam.

The management remains bullish on continued demand growth ahead and targets to achieve 10% y-o-y growth in gloves volume output amid favourable trend in shift towards halogen-free nitrile gloves away from PVC gloves.

In USD terms, average selling prices (ASP) saw a slight improvement, with healthcare increasing by 5%, while cleanroom largely maintained, as the group was able to pass on some of the increases in raw materials costs to customers.

However, in terms of MYR, ASPs have fallen due to weaker USD, coupled with additional about RM0.7 million in foreign worker levy that resulted in lower gross margin.

“Looking ahead, management expressed optimism of passing over the costs and raising ASPs gradually in the following quarters,” says Tan.

In addition, the group expects to boost its current 7.6 billion annual glove production capacity by another 1.4 billion gloves this year, with the new production lines expected to commence production in September.

Currently, utilisation of its existing production capacity stands at around 90% and management believes new orders would quickly fill in to sustain its utilisation at current level with the expansion in capacity.

“The 80:20 split between healthcare and cleanroom gloves is likely to hold after expansion,” adds Tan.

As at 2.35pm, shares in Riverstone are trading 1 cent higher at $1.01 or 2.89 times FY18 book value with a dividend yield of 2.74%.

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