Riverstone Holdings - DBS Research 2016-01-04: More room to grow

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RIVERSTONE HOLDINGS LIMITED AP4.SI 

Riverstone Holdings - More room to grow 

Lifting our 12-month TP to S$2.83 ...

• ... after raising FY16F/17F earnings by 4%/8% on higher USD/MYR forecasts and margin assumptions, and as we revise target valuation multiple from 18x to 20x blended FY16/17 PE as the sector has re-rated. 
• We have lifted our ASPs (in Ringgit terms) even as we expect some of the currency gains from a strengthening US$ to be passed on to customers, and have also raised margin assumptions slightly to account for better economies of scale ahead. 

Strong performance to continue into 4Q15. 

• Benefitting from low raw material prices, robust demand and as three new production lines were commissioned in 3Q15 – boosting production capacity by 13% to 5.2bn gloves, we expect top and bottom line to grow in 4Q15 by 55.8% and 62.0% to RM175m and RM36m respectively. This should bring FY15’s net profit strongly up 77% y-o-y to RM126m. 

Capacity expansion to underpin future growth, with long-term upside from recent acquisition of adjoining land. 

• Riverstone plans to double its annual capacity from 4.2bn gloves in 2014 to at least 8.2bn gloves by 2018 to support growth in both its cleanroom and healthcare glove segments, which could more than double earnings from RM71m in FY14 to RM172m by FY17. 
• Furthermore, Riverstone is able to grow capacity faster than expected as it recently acquired 9.364 acres of land for the construction of a factory and worker hostels. 

Valuation: 

Maintain BUY; raising 12-month TP to S$2.83. 

• As larger peers have re-rated to 31x CY15F PE, we raise our target valuation multiple for Riverstone from 18x to 20x blended FY16/17F PE. This implies a c.35% discount vs 28% previously, which is fair given its smaller capacity. 
• As an export play, we also like Riverstone as a beneficiary of the strong US$ vs RM and its share price should further re-rate as earnings are delivered. 

Key Risks to Our View: 

• Global economic slowdown could impact cleanroom sales – which makes up c.50% of FY15 revenue. 
• While margins for cleanroom gloves tend to be resilient, demand for cleanroom gloves could be threatened in the event of a slowdown in the global economy.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-01-04

DBS Vickers Analyst Report BUY Maintain BUY 2.83 Up 2.49