Riverstone Holdings - RHB Invest 2016-05-20: Solid Company To Tide Through Headwinds Ahead

Riverstone Holdings - RHB Invest 2016-05-20: Solid Company To Tide Through Headwinds Ahead  RIVERSTONE HOLDINGS LIMITED AP4.SI 

Riverstone Holdings - Solid Company To Tide Through Headwinds Ahead

  • We conservatively trim our ASP for Riverstone’s healthcare gloves by 10% and our projected USD/MYR rate to 4.08. As a result, we also cut our forecasted earnings for the next two years. 
  • Maintain BUY, while our DCF- based TP slips to SGD1.02. (from SGD1.18, 17% upside)
  • We believe that the fall in its ASP would be cushioned, as:
    1. The USD/MYR rate trends upward;
    2. Its expansion of an additional 1bn pieces pa in capacity would likely be fully taken up by demand from existing and new customers.

Expansion capacity likely to be fully taken up. 

  • By end-3Q16, Riverstone should increase its capacity by an additional 1bn pieces to 6.2bn pieces of healthcare gloves pa. Despite concerns over the industry’s oversupply issues, the company should have no problem filling up its capacity, albeit at a lower ASP. This is mainly due to:
    1. Its existing healthcare customers, which are likely to continue allocating more orders to Riverstone due to its trusted product quality and customisation services;
    2. New customers from North America, secured end-2015, are also likely to increase their orders.
  • The company’s niche cleanroom business would also act as a defensive cushion, as there is much less competition. On top of that, Riverstone is also launching new products suited for the biotechnology, pharmaceutical, battery and solar space industries.

USD/MYR trending up. 

  • The USD/MYR has appreciated by 6% from a low of 3.84 in April (it is at 4.07 currently). 
  • In 1Q16, the company booked a MYR6.3m forex loss due to the weakening of USD. 
  • Going forward, we expect the value of the USD to be maintained, if not strengthen for the rest of the year. 
  • We expect the company to record a better forex-related performance from 2Q16 onwards, which would be positive for its bottomline.

Still a BUY. 

  • To be conservative, we trim our ASP for its healthcare gloves by 10% due to the stiff competition as well as the current macroeconomic environment. We also lower our USD/MYR rate to 4.08 (from 4.20). As a result, our FY16F-17F earnings are now lower by 7.5%/7.4% respectively.
  • We also adjust our DCF-based TP to SGD1.02. We believe Riverstone is likely to continue outperforming its peers and can fill up its increased production capacity without much issue, due to its:
    1. Solid and prudent management team;
    2. Niche cleanroom business, which yields healthy gross margins of 35- 40%.
  • These factors would help cushion the negative impact from the decline in ASP from its healthcare glove segment. 
  • Key downside risks include the MYR strengthening against the USD and a decline in its ASP.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-05-20
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.02 Down 1.18