Riverstone Holdings (RSTON SP) - Expansion on track; limited impact from repatriation rule
Site visit to Taiping plants in Malaysia
- We visited Riverstone’s manufacturing plants in Taiping, Malaysia. The facility is in good shape and all expansion plans are on track. During the visit, we saw:
- Phase 1 and 2, which started in 2014 and 2015;
- Phase 3 started full production in Nov 2016;
- construction of Phase 4 is expected to be completed in 3Q17.
- Despite strong competition, gloves demand remains strong due to customised and good quality products.
- Riverstone’s recent correction due to Malaysia’s new forex repatriation policy has been overdone, as it has a limited earnings impact.
- Maintain HOLD and TP of SGD0.92 (16x FY17E EPS; 1 SD above mean for superior ROE).
- Valuation is not compelling at this point as the stock is trading at 15x FY17E EPS vs 11-13% FY17-18E EPS growth.
Capacity expansion on track and strong demand
- Phase 3 adds 19% capacity. Phase 4 expansion, which will add another 16% capacity, is on track.
- On the demand side, orders for healthcare gloves were overwhelming due to rising demand from its relatively new US market. For cleanroom gloves, demand continues to recover, after a lacklustre 1H16; volume for FY16 should remain stable.
Water supply key constraint for new capacity
- Many glovemakers are facing utilities constraints for new facilities, especially for water supply. Management said each line requires more than 100 litres of water per minute.
- For Riverstone, it has secured water supply up to phase 5 expansion in 2018 with the relevant authority. Riverstone said it might expand in locations with better water supply in future.
Limited impact from forex repatriation policy
- Riverstone and other Malaysia glove-makers have fallen around 3% this week, after Malaysia announced measures requiring its exporters to repatriate 75% of their foreign currency proceeds to boost external reserves.
- We believe the selling is overdone as the move has a limited impact on Riverstone’s earnings. Its only USD-denominated cost is raw materials, which make up 30-35% of sales. Also, Riverstone could opt to procure from local raw material suppliers who transact in MYR.
- Further strengthening of USD/MYR.
- Further downside to key raw material prices, which are tied to oil prices.
- Better-than-expected product mix upgrade and higher volume growth for high ASP high-margin cleanroom gloves.
- Snap back of MYR against USD.
- Sharp rebound of Butadiene price.
- Slower-than-expected growth of cleanroom glove, which has higher ASP and margin.