Excerpts from analyst's report
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» Results boosted by favourable macroeconomic tailwinds. Riverstone delivered yet another impressive set of results following its strong 1Q performance. Revenue continued to grow by >30% YoY due to strong demand from the healthcare segment and the strengthening of the USD against the MYR.
ASP for the cleanroom segment increased during the quarter while ASP for the healthcare segment held steady (in MYR). Gross margins also held above the 30% level despite larger revenue contribution from the healthcare segment (healthcare: 55% vs cleanroom: 45%), which yielded lower margins. Once again, the margin expansion was attributable to a weaker MYR and cheap raw material costs, which in turn resulted in lower production costs.
» Strong momentum to sustain. Management remains confident that the strong momentum can be sustained moving into 2H. Growth of the cleanroom segment is likely to resume as demand should pick up from 2H onwards, on track for the 10% annual growth target. The macroeconomic tailwinds – a weak MYR and cheap raw material prices caused by low oil prices – are likely to stay and should continue to benefit the group, going forward.
» Estimates raised; reiterate BUY with a higher TP. Hence, we raise our earnings estimates to factor in the favourable industry outlook. We also switch our valuation methodology to DCFE from 1-year forward P/E to better quantify the long-term growth potential of the rubber glove industry, which is undergoing aggressive capacity expansion.
Our new TP of SGD2.06 (CoE: 8.0%, TG: 2%) (from SGD1.54) implies FY15F P/E of 19.7x, in line with the peer average (19.7x). Furthermore, Rivestone’s niche cleanroom business makes it an attractive acquisition target for other glove makers.
