Riverstone Holdings - Maybank Kim Eng 2016-02-25: Strong finish, still positive

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) - Strong finish, still positive

FY15 core earnings were slightly above expectations, at 103%/101% of our/consensus forecast and increased by 72% YoY.
For 4Q15, core earnings grew 85/23% YoY/QoQ.
Operating cash flows were similarly robust, growing 94% YoY for FY15. The beat came mainly from lower taxes, from reinvestment allowance.

The robust growth was attributable to
1. c.40% increase in volume,
2. strong USD/MYR,
3. low material price and
4. improved efficiency from expansion activity.

Despite a mild slowdown in 4Q15 due to seasonality from customers destocking, revenue grew 2% QoQ on the back of stronger USD/MYR.
Management highlighted that production has resumed to its optimal level in 1Q16 and the plant is operating at optimal utilisation rate of 90%.
Also, despite the volatility in USD/MYR FX rate in early 2016, YTD USD/MYR average of 4.2 is still 8% above the average rate of 3.9 for 2015.
Raw material, nitrile butadiene also continued on a downtrend.
Separately, management expects more tax benefits, as the Malaysian government has introduced a special reinvestment allowance for the purpose of expansion, modernisation and automation from 2016-2018.

Riverstone’s sales to the US, the largest healthcare glove market, has more than doubled in 2015, from 5% to > 10% of group’s sales.
Management attributes this to its ability to produce customised products such as laboratory gloves.
For its cleanroom gloves, it continues to gain new customers in the Asia Pacific region, more than offsetting the slowdown. It maintained its target to grow this segment by 10%.

We raise our FY16-17 EPS by 5-6% after housekeeping adjustments, but we trim TP to SGD1.18 from SGD1.30 after adjusting for reduced target PER of the Malaysia glovemakers under our coverage.
Our TP is now pegged to 19x FY16E EPS, down from 22x previously.
Riverstone trades at 20% discount to peers’ FY16 P/E, despite having better ROE and EBITDA margin. Risk from significant depreciation of USD/MYR.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-02-25

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.18 Down 1.30