Riverstone Holdings - UOB Kay Hian 2015-12-02: Everything Has A Price; Downgrade To HOLD

Riverstone Holdings - UOB Kay Hian 2015-12-02: Everything Has A Price; Downgrade To HOLD RIVERSTONE HOLDINGS LIMITED AP4.SI 

Riverstone Holdings (RSTON SP) - Everything Has A Price; Downgrade To HOLD 

  • We downgrade the stock to HOLD from BUY after its stellar outperformance. 
  • The group remains on track to see its healthcare glove production capacity grow to 8.2b pieces/year by 2018 and an earnings CAGR of 30% over the next 3 years, but these positives appear to be priced in. 
  • We have a target price of S$2.34, based on the sector’s FY16F PE of 19.4x. 
  • Entry price: S$2.10. 


WHAT’S NEW 


• It has been a great ride. 

  • Since our BUY initiation in May 14, the stock has been a stellar performer, rising by 165%. While we think that the fundamentals remain intact, much of the positives have been priced in, including the capacity expansion and currency gains from a weak ringgit. 

• Downgrade to HOLD on limited upside. 

  • Based on the sector 2016F peer valuation of 19.4x (please see table on peer valuation comparison in the next page), we have a revised target price of S$2.34 (previously S$2.31). 
  • Given the limited upside of only 3% to our revised target price, we downgrade the stock to HOLD. 


STOCK IMPACT 


• In our view, a potential M&A could serve as an upside risk to our downgrade. 

  • This could transpire via an accretive M&A by Riverstone or a third-party acquisition of Riverstone for its niche expertise in cleanroom gloves and its growing capacity for healthcare gloves. In the latter case scenario, a suitor would likely have to pay premium valuations, which could provide upside risk to our target price and recommendation. 

• Solid management execution on expansion. 

  • The second phase of the expansion of its Taiping, Malaysia plant is well on track. 
  • Management is not resting on its laurels as initial preparations for phase 3 of the plant are already underway. The group guided that phase 3 is slated for completion in 3Q16 and given its prior track record for phase 1 and 2, we are confident of its timely completion. 
  • We estimate the expected cost for phase 3 is slightly under RM75m and will boost the group’s production capacity by another 1.0b gloves p.a. 

• Generating cash for future growth. 

  • The group's cash generation capabilities remain strong, with an operating cashflow of RM108.4m, which is enough to fund its capacity expansion in FY15. 
  • Despite recording a capex of RM44m ytd, the group remains in a net cash position of RM136.5m (S$0.12/share). 

• Still healthy margins. 

  • We are confident of the group’s ability to defend its gross margins, especially in the cleanroom segment. 
  • Riverstone’s first-mover 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 ASPs (on a US dollar basis) for healthcare gloves have been under pressure, Riverstone has been a beneficiary of the weak ringgit. 


EARNINGS REVISION/RISK 


• No change to estimates with a projected 3-year net profit CAGR of 30%. 

  • Fundamentally, we remain upbeat on its earnings outlook on: 
    1.  the 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. 


VALUATION/RECOMMENDATION 


• Downgrade to HOLD. 

  • We have a revised target price of S$2.34 (previously S$2.31), pegged at the sector FY16F PE of 19.4x to our 2016F EPS of 12.0 S cents. 
  • Our entry price is S$2.10. 


KEY RISKS 

  • Accretive M&A or other corporate developments. 
  • 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.



Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-12-02
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 2.34 Up 2.31


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