Riverstone Holdings - CIMB Research 2016-02-25: Strong FY15 results within expectations

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - Strong FY15 results within expectations

FY15 core net profit was in line, at 102% of our full-year forecast.
Reported profit surged 74% yoy in FY15 due to
1. expanded capacity,
2. favourable FX translation, and
3. low raw material prices.

Capacity set to expand by 19% yoy to 6.2bn pieces p.a. by end-FY16 (FY15: 5.2bn). We expect the expanded capacity to be fully taken up by new orders.
Raise FY16-17F EPS by 4.0-4.5% as we incorporate slightly slower GPM reversion.
Maintain Hold and TP of S$1.07 (pegged to peer average of 16.4x CY17F core P/E).

Revenue surged 40% yoy to RM560m in FY15 due to increased sales volume of gloves and higher ASP in ringgit terms.
Net profit rose by an even stronger 74% yoy to RM127m, helped by the higher GPM achieved in FY15.
Riverstone declared a final dividend of 5.25 sen per share, raising the full-year payout to 6.45 sen; this translates to dividend yield of 2.6% for FY15.
It has zero debt and RM129m cash as at end-FY15.

GPM reached a 5-year high in FY15 at 31.2% (FY14: 27.3%), due mainly to
1. the strengthened US$ (70-80% of group sales denominated in US$ vs. 40-50% of production cost), and
2. low raw material prices (price of butadiene was on average c.30% lower in FY15 than in FY14).
Given that the FX rate and raw material prices seem to have stablised, we anticipate a moderate GPM reversion in FY16-18, driven by potentially higher competition among glove producers.

FY16 should benefit from the full-year contribution from the phase II expansion capacity of 1bn pieces (completed in Nov 15).
Management guided that the phase III expansion capacity, comprising six production lines totaling 1bn pieces, is slated to commence operations in stages from 3Q16. The phase III capacity should be fully operational by end-FY16, raising the group’s total capacity by 19% yoy to 6.2bn pieces p.a.

Management remains optimistic of securing orders from new customers.
We understand that Riverstone has secured a contract to supply cleanroom and healthcare products to a major US glove distributor. Management estimates this contract would increase the group’s US sales contribution to over 10% in FY16, from below 5% currently.
We expect the recurring contracts from the group’s existing customers and new contracts secured to keep the group’s production lines at full utilisation in FY16.

Currently trading at 15.6x CY17F core P/E, Riverstone’s valuation is broadly in line with its major Malaysian peers averaging at 16.4x (excl. the outlier Supermax).
Though EPS growth should continue to be supported by the anticipated capacity expansion, we caution that a possible trend reversal of US$:RM exchange rate would have an undesirable impact on the group’s profit margin.

Roy CHEN CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-25

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.07 Same 1.07