Riverstone Holdings - DBS Research 2016-11-10: Shrouded by near-term challenges

Riverstone Holdings - DBS Vickers 2016-11-10: Shrouded by near-term challenges RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - Shrouded by near-term challenges

  • 3Q earnings recovery (+9.2% q-o-q to RM29.8m) as new capacity kicks in.
  • Persistent headwinds and temporary spike in raw material prices could mitigate contributions from oncoming capacities in 4Q16.
  • Cut earnings for FY16F/17F by 6.1%/4.6%.
  • Maintain HOLD with a slightly higher TP of S$0.97 as we roll forward our earnings base to 16x FY17F.


Maintain HOLD with a slightly higher TP of $0.97 

  • Maintain HOLD with a slightly higher TP of $0.97 as we roll forward our earnings base to FY17F; near-term prospects still shrouded by persistent headwinds. 
  • With the reversal of USD/MYR trends and heightened volatility in raw material prices, the tailwinds of 2015 – which led to an exceptional year for Riverstone (and the glove industry at large), now serve as headwinds to the company’s near-term prospects.
  • Despite an improved performance in 3Q, near-term concerns over ASPs and other persistent headwinds should continue to weigh. This will likely be exacerbated by the recent spike in Butadiene prices, which could potentially raise raw material costs and mitigate contributions from the commissioning of remaining lines in 4Q16. 
  • We now assume a slightly higher healthcare glove mix ahead and lower our gross margin assumptions by 1%/0.5% for FY16F/17F, which translates to a 6.1%/4.6% reduction in FY16F/17F earnings respectively.


Capacity expansion to underpin long-term growth... 

  • Riverstone plans to double its annual capacity from 4.2bn in 2014 to at least 8.2bn gloves by 2018 to support growth in both its cleanroom and healthcare glove segments.
  • Phase 3 expansion plans are on track, and the gradual commissioning of new production lines from July 2016 onwards should grow Riverstone’s annual production capacity by 19.2% y-o-y to 6.2bn by end-FY16. With strong expected demand, especially in the healthcare segment, earnings could nearly double from RM71m in FY14 to RM142m by FY18F.
  • Separately, while some peers are scaling back on expansion plans, we note that Riverstone’s additional capacity of 1bn p.a. by end-2016 has already been fully committed – mainly from its new markets of US and Japan. We thus believe that the company could potentially accelerate expansion plans to leverage on the strong demand.


Valuation

  • Maintain HOLD with a slightly higher TP of S$0.97. 
  • As we roll forward our earnings base to FY17F, we arrive at a slightly higher TP of S$0.97 (based on 16x PE, or a c.20% discount to larger peers).


Key Risks to Our View

  • Global economic slowdown. While margins for cleanroom gloves tend to be resilient, demand for these gloves – which made up about half of 3Q16 revenue – could be threatened in the event of a slowdown in the global economy.




Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-11-10
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.97 Up 0.960




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