Riverstone Holdings - UOB Kay Hian Research 2015-10-13: Expansion On Track

Riverstone Holdings - UOB Kay Hian Research 2015-10-13: Expansion On Track RIVERSTONE HOLDINGS LIMITED AP4.SI 

Riverstone Holdings (RSTON SP) Expansion On Track 

  • Our visit to Riverstone’s Taiping plant reaffirms our positive view. The group is on track to see capacity grow to 8.2b pieces p.a. by 2018 with a net profit CAGR of 30% over the next three years. 
  • Maintain BUY and target price of S$2.27, based on sector 2016F PE of 18x. 

WHAT’S NEW 


 Plant visit to track expansion progress. 

  • We visited Riverstone Holdings’ (Riverstone) Taiping plant recently to view the progress of phase 2 at the new plant. This report highlights the key takeaways from the visit. 

STOCK IMPACT 


 Expansion on track. 

  • The second phase of the expansion of its Taiping plant in Malaysia is well on track. Of the six lines under the phase 2 expansion plan, four lines have been completed. The fifth line is targeted for completion at end-October and the final line by end-November. Management is not resting on its laurels as initial preparations for phase 3 of the plant are already underway. The timeline for completing phase 3 is 3Q-4Q16 and with its experience in phase 1 and 2, we are confident of a timely completion. We estimate the cost for phase 3 is slightly under RM80m. 

 Demand remains firm. 

  • So far, the indicative demand has been strong. We understand that all the new capacity from phase 2 has been taken up by its new and existing clients (50:50). Given the strong demand, we forecast its utilisation rate at 90% for phase 2. 

 Still healthy margins; boost from weak ringgit. 

  • We are confident of the group’s ability to defend its gross margins, especially within the cleanroom segment. Riverstone’s firstmover advantage and its understanding of the cleanroom glove market differentiate the group from competitors. In addition, smaller glove makers would likely face difficulties in producing the relatively more complex cleanroom gloves, which would require large investments dedicated to R&D as well as stringent certifications and approvals. However, conditions for healthcare gloves remain very competitive. While the average selling price (in US$) of healthcare gloves has been under pressure, Riverstone has been a beneficiary of the weak ringgit. 

 Windfall from a firm US dollar. 

  • Malaysian glove makers are likely to benefit from a rising US dollar as most of their sales are in US dollars. We estimate every 1% strengthening of the US dollar (vs the ringgit) could raise Riverstone’s pre-tax profit by RM0.7m. The US dollar has strengthened 16% against the ringgit ytd. Despite the significant strength we believe the group may not enjoy the full rise in US dollar vs the ringgit as the ASP (in US$) could be adjusted downward, particularly for healthcare gloves as competition remains intense. 

 Generating cash for future growth. 

  • With RM96m in net cash and operating cash flow of RM54m in 1H15, the group is in a good position to maintain its target of a 45% dividend payout ratio. We expect the group to remain free cash flow positive. 

EARNINGS REVISION/RISK 

  • Projected 3-year net profit CAGR of 30% for 2014-17. We remain upbeat on Riverstone’s earnings outlook on the back of: 
    1. strong take-up of its cleanroom gloves in the tablet and mobile segments, 
    2. resilient demand from the healthcare sector, and 
    3. production capacity expansion from 4.2b pieces in 2014 to 8.2b pieces in 2018. 
  • While the healthcare glove industry remains competitive, we believe Riverstone will be well positioned, given its product quality and management’s strong track record. 

VALUATION/RECOMMENDATION 

  • Maintain BUY and target price of S$2.27, pegged at the sector’s historical mean PE of 18x applied to our 2016F EPS of 12.3 cents. Given the higher ROE and yield, Riverstone is trading attractively at 17.3x 2015F PE and 14.5x 2016F PE, vs peers’ average of 21.6x and 18.5x respectively. 

KEY RISKS 

  • Margin compression from higher raw material prices and production costs. 
  • Foreign exchange risk. 
  • Oversupply of healthcare gloves and intense competition. 
  • Cyclical risk from high exposure to the electronics industry. 
  • Counterparty risk.


Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.27 Up 2.24


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