Riverstone Holdings - DBS Research 2016-05-09: Pausing for breath

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings - Pausing for breath

Lacklustre 1Q16 earnings (+0.6% y-o-y to RM27.2m) to continue into 2Q.
Unfavourable mix shift towards more healthcare gloves offsets capacity growth in 2016.
Downgrade to HOLD, based on 16x blended FY16/17F earnings.

We reduce FY16F/17F earnings by -15/-20% on a combination of lower USD/MYR forecasts, higher healthcare glove output mix (which carries lower margins) and slightly lower healthcare glove margins, and also revise target valuation multiple from 18x to 16x blended FY16/17F PE to account for lower earnings growth.
Since our last update, our USD/MYR forecasts for FY16/17F have also shifted from 4.34 to 4.10, which had a -5.4% impact on our FY16-17F earnings forecasts.

1Q profits grew 0.6% y-o-y to RM148.1m, primarily as the Group suffered net foreign exchange loss of c.RM3m after the Ringgit strengthened by c.10% against the US dollar between January and March 2016.
Cleanroom glove volumes also declined by c.30% y-o-y, and contributed to 18% of total glove output in 1Q16 – below expectations of 25% previously.

While ongoing automation efforts - which have yielded good results previously, should provide some relief from continued ASP pressure, we think that with cleanroom demand still weak, 2Q numbers could disappoint.

Beyond 2Q, with the gradual commissioning of new production lines from June 2016, Riverstone’s annual production capacity should grow by 19.2% y-o-y to 6.2bn by end-FY16.
While current order books indicate healthy take-up of these new capacities, the unfavourable mix shift towards a higher proportion of lower-margin healthcare gloves due to weak HDD sector, will likely offset capacity growth in 2016.
We thus expect flat earnings growth of 2.4% y-o-y to RM129.5m for FY16F and higher growth of 9.4% y-o-y to RM141.7m in FY17F.

Downgrade to HOLD; lower 12-month TP to S$1.00.
To account for lower earnings growth, we lower our target valuation multiple for Riverstone from 18x to 16x blended FY16/17F PE.
Given its smaller capacity, the implied discount of c.30% to larger peers appears fair.

Global economic slowdown. While margins for cleanroom gloves tend to be resilient, demand for these gloves – which makes up c.45% of 1Q16 revenue – could be threatened in the event of a slowdown in the global economy.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-05-09

DBS Vickers Analyst Report HOLD Downgrade BUY 1.00 Down 1.30