Riverstone Holdings - UOB Kay Hian 2015-11-09: 3Q15 ~ Keeps On Delivering; Still a BUY

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) 3Q15: Keeps On Delivering; Still a BUY

Recurring 9MFY15 net profit grew a stellar 62% yoy, boosted by volume growth and margins.
The group is on track to deliver a 3-year net profit CAGR of 30%, underpinned by its capacity expansion.
Riverstone remains on our BUY list with a higher target price of S$2.31, based on peer comparison.

Excluding exceptional items (mainly a net gain of RM9.6m from items such as forex), Riverstone Holdings’ (Riverstone) underlying 9MFY15 net profits grew 62% yoy to RM79.7m. This accounts for 71% of our full-year forecast and looks to be in line with our and market expectations.
Management has also announced a 1-for-1 bonus issue. Details on the ex and books close date will be announced later.

9MFY15 turnover grew 42% yoy, helped by its capacity expansion. A 5.1ppt rise in net margin to 22% led to an 84% rise in net profit to RM89.3m. In terms of operating margins for the two key segments, healthcare margins were 26% whereas cleanroom margins were circa 36-38%.

The group's cash generation capabilities remain strong, with operating cash flow of RM108.4m, which is enough to fund its capacity expansion in 2015. Despite a capex of RM44m ytd, the group remains in a net cash position of RM136.5m (S$0.12/share).

Given the stiff competition, we believe the healthcare operating margins of 26% in 3Q15 may not be sustainable.
Nevertheless, management has done well in areas such as customisation and superior quality, which have helped them retain and secure new clients. Management also explained that the sharp 48% yoy increase in 9M15 general and administrative expense is due to an additional month of bonus paid to its foreign workers to compensate them for the weak ringgit upon the translation of their ringgit-denominated pay back to their home currency.

The second phase of the expansion of its Taiping, Malaysia plant is well on track. Out of the six lines under the phase 2 expansion plan, four lines have been completed. The fifth line is targeted for completion in 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 is already underway. In the results announcement, management guided that phase 3 is expected to be completed in 3Q16 and given the prior track record for phases 1 and 2, we are confident of its timely completion.
We estimate the expected cost for phase 3 to be slightly under RM75m and will boost the group’s production capacity by another 1,0b gloves p.a.

So far, the indicative demand has been strong. We understand that all the new capacity from phase 2 has already been taken up by a combination of new and existing clients (50:50). Global demand for healthcare gloves is projected to rise 10% p.a. and management continues to enjoy strong demand from clients.

We have trimmed our estimates by 1-3% to work in higher costs. On our new estimates, we forecast a 3-year CAGR of 30% for its net profit.
Our upbeat view on its earnings outlook is predicated on:
1. strong take-up of its cleanroom gloves in the tablet and mobile segment,
2. resilient demand from the healthcare sector, and
3. production capacity expansion from 4.2b in 2014 to 8.2b in 2018.
Whilst the healthcare glove industry remains competitive, we believe Riverstone is well-positioned given its quality and management’s strong track record.

BUY with a higher target price of S$2.31 (from S$2.27), based on the sector’s mean PE of 19.2x applied to our 2016F EPS of S$0.12.
Given its higher 2016F ROE of 28.3% compared with its peer average of 18.4%, we believe our valuation benchmark is inexpensive and offers potential further valuation expansion.
RSTON’s 2016F dividend yield of 2.5% is also decent.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-09

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.31 Up 2.27