Riverstone Holdings - Maybank Kim Eng Research 2015-10-01: Malaysia NDR ~ Eye Opener

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - Malaysia NDR: Eye Opener

Investors impressed with Riverstone’s dominance of lucrative cleanroom gloves during our recent NDR. Addressed concerns on possible slowdown of HDD segment, competition & liquidity.
Near-term positives: earnings boost from strong USD/MYR, strong demand for new capacity & possible liquidity boost. We raise FY15-17 EPS by 3-5% for FX effects. Medium-term risk: rising competition for healthcare gloves.
Maintain BUY & SGD2.12 TP, now at 19x FY16 P/E (from 18x). Expect catalysts from possible actions to boost stock liquidity.

We hosted an NDR for Riverstone in Malaysia. Many institutional funds were already familiar with healthcare gloves but found Riverstone’s dominance of the cleanroom-glove niche appealing. Investors particularly liked its above-average ROEs, margins and lessdemanding valuations than local peers.

Management is considering options to boost liquidity. It also said Riverstone has been able to reap the most benefits from USD/MYR strength, due to low competition in the cleanroom space.
Riverstone’s penetration of Vietnam may also partly compensate for lacklustre demand in the HDD segment.

Riverstone is well-prepared to face rising competition in healthcare gloves. It customises 50% of its gloves for customers for whom quality is more important than costs.
To be conservative, we have factored in a 15% USD-denominated ASP decline for FY16 in the context of a USDMYR rate of 4.12. Management shared that it should not be difficult to fill up its new capacity in 3Q16, if it is willing to pass on USD benefits. It has been turning down many orders due to capacity constraints.
Maintain BUY. Our TP is unchanged even after some adjustments. We raise:
1. SGD/MYR assumption to 3.0 from 2.7;
2. FY15-17 EPS by 3- 5% to reflect a higher USD/MYR; and
3. our target P/E to 19x from 18x following the sector’s re-rating. This is still at a discount to our average 21x target for its peers, to factor in its smaller size.

Riverstone’s dominance originated from its strong brand and relationships built by directly supplying its end-customers. This enables its engineers to work hand-in-hand with customers to provide tailor-made products, suited to their changing needs. Furthermore, its products boast best-in-class features, such as a much lower electrostatic discharge than the next best product in the market.
On why other major glove makers are not breaking into this segment, management replied that this is too small a segment for the volume players. Cleanroom gloves require strong specialties and efforts.

Riverstone’s cleanroom-glove customers, which account for 70% of its gross profits, require little pass-on of currency benefits. This is because most have a USD revenue base and Riverstone faces low competition in the industry. Gloves also only account for a fraction of their spending.

Riverstone has filled its entire production capacity till year-end and has had to turn down some orders due to capacity constraints. Its expansion is on track, with full utilisation of its new capacity by Oct 2015. In addition, Phase 3 expansion has started and full production could potentially commence by Oct 2016.

Management has been exploring options such as bonus issues, stock splits and share placements to increase Riverstone’s trading liquidity. However, it did not provide any timeline.

Orders from HDD customers have been flat QTD. In the past, 3Q used to be a seasonally stronger quarter. However, new customers from Vietnam have helped to take up the slack.
Riverstone also intends to expand its market for lower-end cleanroom products, typically used by flat-panel and mobile device makers. Many users are still using more inferior PVC gloves in the market.

John Cheong Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-01

Maybank Kim Eng Analyst Report BUY Maintain BUY 2.12 Same 2.12