Riverstone Holdings - CIMB Research 2015-11-06: Strong 3Q results, but lofty valuation

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RIVERSTONE HOLDINGS LIMITED AP4.SI 

Riverstone Holdings - Strong 3Q results, but lofty valuation 

• At 73% of our full year forecast, 9M15 core net profit is deemed slightly above our expectations, as we expect a stronger 4Q driven by newly added capacity. 
• Reported net profit surged 114% yoy in 3Q15, due to 1) expanded capacity, 2) favourable FX translation and 3) low raw material price. 
• Gross profit margin (GPM) reached 5-year high, at 31.9% in 3Q15 (3Q14: 25.8%). 
• Raise FY15-17F EPS by 5-15% to reflect the favourable FX and raw material price. 
• Roll forward and raise target price to S$2.15 (CY17F P/E of 17.5x); downgrade to Hold. 

Strong 3Q on lifted capacity, favourable FX and raw material price 

• Reported net profit surged 114% yoy to RM35.3m in 3Q15 (3Q14: RM16.5m) on the back of 
  1. expanded capacity (two single lines of c.250m p.a. capacity from phase II expansion started operation in 3Q15); 
  2. favourable FX translation (70-80% of the sales made denominated in US$ while 40-50% production cost in US$) and 
  3. benign raw material prices (butadiene price was at 0.8 std below historical average in 3Q15). 

Expanded revenue, led by more generic healthcare segment 

• According to management, 3Q15 top-line growth of 46.7% yoy was led mainly by the healthcare segment, which was up > 60% yoy, compared to cleanroom’s c.12% yoy gain. 
• In value, cleanroom and healthcare formed about c.40%/60% of sales in 3Q15 (FY14: c.50%/50%); in volume, c.25%/75% (FY14: c.30%/70%). 
• We expect c.10% yoy sales growth for cleanroom gloves and 21-27% yoy growth for healthcare gloves in FY16 and FY17, driven by increasing demand and supported by expanded capacity. 

3Q15 GPM at 5-year high; GPM reversion very likely in FY16-17 

• Fueled by favourable FX and benign raw material prices, 3Q15 group GPM surged to 31.9% (3Q14: 25.8%). 
• The GPM expansion was mainly from the healthcare segment – its GPM rose c.8% pt yoy to 26% in 3Q15 (3Q14: c.18%). GPM of cleanroom gloves rose by a lesser c.3-4% pt yoy, due to some product mix shift within the segment. We expect GPM reversion in FY16-17, due to stiff competition in the healthcare segment. 
• Management has seen a 5% qoq drop in US$ ASP for healthcare gloves in 3Q15. 

Phase II fully operational in 4Q15, launching phase III in FY16 

• All six production lines (two single, four double) of phase II expansion should be fully operational by Nov-15, raising the group’s total production capacity to 5.2bn pieces p.a. (FY14: 4.2bn). 
• We understand that the additional capacity has been fully taken up by new orders from customers. There has also been indications of commitment for phase III capacity of another 1bn pieces, which management expects to complete by 3Q16. 

Downgrade to Hold on lofty valuation 

• The share price has gained over 20% over the past month or so. Its valuation is no longer compelling, in our view, against its major Malaysian peers. 
• Our new TP of S$2.15 is based on CY17F core P/E of 17.5x (pegging to Malaysian peer average). 
• While we still like Riverstone’s niche cleanroom segment and the group’s meaningful capacity expansion ahead, we believe the positives have been priced in. 
• Competition is a key risk. 
• Downgrade to Hold. Management has proposed a 1-for-1 bonus issue, subject to EGM.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-06

CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 2.15 Up 1.92