Riverstone Holdings - UOB Kay Hian 2016-02-26: 2015 Solid Results; Attractive Again After Recent Pull-back

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) 2015: Solid Results; Attractive Again After Recent Pull-back

Net profit grew 78% on higher revenue growth as well as a 4.8ppt expansion in margins to 22.6%.
Riverstone’s expansion plans are on track and we expect its capacity to rise to 8.2b gloves by 2018 (from 5.2b as at 2015) to underpin a 3-year EPS CAGR of 14%.

We have raised our 2016-17 net profit forecasts by up to 7% and also upgraded our rating to BUY after the share price pull-back of 22% from its recent high.
We have a PE-based target price of S$1.23.

Riverstone Holdings (Riverstone) delivered a 2015 net profit of RM126.5m (+78.4% yoy), which was broadly in line with our forecast (RM118.9m or 6% ahead).
The strong results were on the back of revenue exhibiting a higher growth to RM560.2m (+40.3% yoy) as well as an expansion in net margins by 4.8ppt to 22.6%.
The improvement was underpinned by stable raw material prices, improved operational efficiency (higher level of automation) and a strong US$/RM.

Riverstone proposed a final dividend of 5.25 sen per share, bringing the total DPS for 2015 to a record of 6.45 sen/share (+87% yoy), with dividend payout of 37.8%.
Given Riverstone's strong cash flow generation capabilities (2015 net cash stands at RM58.5m and solid operating cash flow of RM122.1m (+94.4%yoy)), we expect a dividend payout of >35% to be sustainable.
We also expect the group to remain free cash flow positive (> RM67m p.a.).

On the production front, things are well on track. Riverstone has completed the second phase of its Taiping Malaysia plant, and to capture growth in customer orders from new and existing clients, the company has also accelerated expansion plans and commenced construction for the third phase. This will boost the total production capacity to 6.2b by end-16. By 2018, we expect the group’s capacity to rise to 8.2b gloves p.a. (58% growth from 2015).

Going into 2016, we understand there could be potential for a reduction in costs. While labour costs are anticipated to rise 8-10%, there is still room for costs to decline following efficiency gains arising from capacity expansion (lower changeover time which currently takes up to two days).

While the competitive environment is challenging, Riverstone has been successful in creating value through its ability to manufacture a diverse range of products, ranging from clean room to food industries and healthcare gloves. This is especially value-adding for clients who seek flexibility and diversity in their purchases. Management also cited innovation as one of their key differentiating factors.
More recently, Riverstone ventured into a niche and high margin area in laboratory, which we understand can potentially garner a gross margin of over 50%.
Another launch we can look out for on the R&D front will be “zinc-free” gloves. This will potentially be of interest to the food industry, which generally appreciates chemical-free products when it comes to handling of food products.
Geography wise, management is upbeat about US-based healthcare consumers. Coupled with expansion of production capacity, we expect higher sales growth from the North America region going forward.

We have adjusted our 2016-17 net profit forecast upwards by 5-7% to factor in higher top-line growth (to reflect growth in sales from US and new products) as well as lower operating expenses from efficiency gains.
Additionally, we introduce our 2018 estimates.

Riverstone is currently trading attractively at 15.5x 2016F PE (15.8% discount) and 13.7x 2017F PE (17% discount), vs peers’ average of 18.4x and 16.5x respectively.
In our view, the discount is clearly not warranted given the group’s higher-than-peer ROE of 27.6% (vs sector’s 20.5%).
Management is also executing its strategy well and looks on track to deliver a 3-year EPS CAGR of 14%.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-26

UOB Kay Hian SGX Stock Analyst Report BUY Upgraded HOLD 1.23 Up 1.17