Riverstone Holdings - DBS Research 2016-02-26: More room to grow

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - More room to grow

FY15 earnings of RM126.5m within expectations
1st production line of Phase 3 expansion likely to be commissioned in June/July 2015
DPS of 6.45 sen for FY15

We revise FY16F/17F earnings by -2%/+3% on lower USD/MYR forecasts, and as we revise target valuation multiple from 20x to 18x blended FY16/17 PE as the sector has de-rated.
While we have reduced our ASPs (in Ringgit terms) as we expect some of the benefits of the strengthening US$ and low raw material costs to be passed on to customers, we have lifted earnings estimates for FY17 after raising margin assumptions slightly to account for a better outlook, productmix and economies of scale ahead.

Even as Malaysian glove manufacturers’ sales were pushed back towards the end of 4Q amidst the reduction of their distributors’ inventory lead time from 2-3 months down to 1-2 months, Riverstone still managed to deliver strong growth in 4Q as it ramped up production on its newly commissioned lines.
Riverstone’s 4Q15 earnings grew 66.4% y-o-y to RM37.2m, bringing FY15’s net profit strongly up 78% y-o-y to RM126.5m.

as ongoing capacity expansion underpins future growth, and as we see long-term upside from recent land acquisition.
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 RM176m by FY17.
Furthermore, Riverstone is able to grow capacity faster than expected as it recently acquired 9.364 acres of adjoining land for the construction of a factory and worker hostels.

As larger peers have de-rated to 21x CY16F PE, we revise our target valuation multiple for Riverstone from 20x to 18x blended FY16/17F PE, similar to its 12-month average.
Given its smaller capacity, the implied discount of 15% appears fair.
As an export play, we also like Riverstone as a beneficiary of a stronger US$ vs RM and its share price should further re-rate as earnings are delivered.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-02-26

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