Riverstone Holdings (RSTON SP) - UOB Kay Hian 2016-12-12: Expansion Plans On Track But Recovery Gradual

Riverstone Holdings (RSTON SP) - UOB Kay Hian 2016-12-12: Expansion Plans On Track But Recovery Gradual RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) - Expansion Plans On Track But Recovery Gradual

  • We visited Riverstone’s Taiping plant in Malaysia. Expansion plans seem to be on track where building construction for Phase 4 has started and is scheduled to complete in Jul 17. 
  • Meanwhile, three other phases are operating smoothly, with firm demand and utilisation at 95%. 
  • We expect 2017 performance to recover on a low base, but believe the turnaround will be gradual due to a change in product mix and the lack of pricing power amid a competitive operating environment. 
  • Maintain HOLD and target price of S$0.94. Entry price: S$0.80.



WHAT’S NEW


Plant visit to track expansion progress. 

  • We visited Riverstone’s Taiping plant in Malaysia to view the progress on its expansion projects. 
  • Recall Riverstone entered a fivephase expansion project to add 5b pieces of gloves (1b yearly) to bring total production capacity to 8.2b pieces by 2018. This report highlights the key takeaways from the visit.


STOCK IMPACT


Phase 3 started production. 

  • Phases 1 and 2 have been in full swing since 2014 and 2015 respectively. Meanwhile, the third phase is on track, with all 6 dipping lines (4 single and 2 double lines) running currently. The expansion is targeted to add 1b gloves to raise total annual production capacity to 6.2b pieces by end-16.

Strong demand. 

  • We understand all the new capacity from phase 3 has been taken up. Utilisation rate currently stands at 95%. 
  • Initial preparations for phase 4 underway. Phase 4’s factory building construction started in Aug 16 and is scheduled to complete in Jul 17. This could add another 1b gloves to production capacity. We estimate the cost for phase 4 at RM70m-80m.

Limited impact from Malaysian central bank’s foreign exchange policy. 

  • Recently, Bank Negara Malaysia directed exporters to convert 75% of their proceeds into ringgit in a move to boost ringgit demand. The initial concern was that rubber glove markers would lose their natural hedge as the industry typically uses the US dollar as a hedge to cushion the cost of raw materials. However, we believe the impact is nominal for Riverstone.
  • Currently, raw materials (in US$) make up only 30-35% of Riverstone’s production cost. Moreover, Riverstone can switch to local suppliers who deal in ringgit. 
  • Meanwhile, Riverstone remains a beneficiary of a strong US$/RM where our sensitivity analysis shows every 1% appreciation in US$/RM would lift FY16-17 pre-tax profit by RM0.9m (or 0.7%).

Healthcare gloves entering a steadier state. 

  • With the ASP decline for healthcare gloves largely abating, we believe Riverstone is likely to maintain long-term normalised margins of 17-18% for healthcare gloves going forward where the bulk of the volume will come from the US and Europe.

Cleanroom sales saw gradual recovery from 1H16. 

  • Meanwhile, sales volume for cleanroom gloves has recovered from the lows of 1H16 due to a pick-up in demand from component manufacturers for smartphones and tablets, as well as from the automobile sector. 
  • Margins for cleanroom gloves remained stable at 37-38%. We expect product mix for cleanroom and healthcare gloves to remain at 20:80 next year.


EARNINGS REVISION/RISK

  • None.


VALUATION/RECOMMENDATION

  • Maintain HOLD and target price of $0.94, pegged at the sector’s 2017F PE of 16.4x to our 2017F EPS of 6.0 S cents. 
  • We expect 2017 performance to recover on a low base on the back of higher utilisation and improved operational efficiency. 
  • Nevertheless, we expect the turnaround to be gradual, due to a shift in product mix and the lack of pricing power in a competitive operating environment. Entry price is S$0.80.


KEY RISKS

  • M&A or other corporate developments.
  • Margin compression from higher raw material prices and production costs.
  • Foreign exchange risk.
  • Cyclical risk from high exposure to the electronics industry




Thai Wei Ying UOB Kay Hian | Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2016-12-12
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.940 Down 0.980






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