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:
- the strong take-up of its cleanroom gloves in the tablet and mobile segment,
- resilient demand from the healthcare sector, and
- 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
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http://research.uobkayhian.com/
2015-12-02
UOB Kay Hian
SGX Stock
Analyst Report
2.34
Up
2.31
