Riverstone Holdings (RSTON SP) - Maybank Kim Eng 2016-12-08: Expansion on track; limited impact from repatriation rule

RIVERSTONE HOLDINGS LIMITED AP4.SI

Riverstone Holdings (RSTON SP) - Expansion on track; limited impact from repatriation rule

We visited Riverstone’s manufacturing plants in Taiping, Malaysia. The facility is in good shape and all expansion plans are on track. During the visit, we saw:
1. Phase 1 and 2, which started in 2014 and 2015;
2. Phase 3 started full production in Nov 2016;
3. construction of Phase 4 is expected to be completed in 3Q17.

Despite strong competition, gloves demand remains strong due to customised and good quality products.
Riverstone’s recent correction due to Malaysia’s new forex repatriation policy has been overdone, as it has a limited earnings impact.
Maintain HOLD and TP of SGD0.92 (16x FY17E EPS; 1 SD above mean for superior ROE).
Valuation is not compelling at this point as the stock is trading at 15x FY17E EPS vs 11-13% FY17-18E EPS growth.

Phase 3 adds 19% capacity. Phase 4 expansion, which will add another 16% capacity, is on track.
On the demand side, orders for healthcare gloves were overwhelming due to rising demand from its relatively new US market. For cleanroom gloves, demand continues to recover, after a lacklustre 1H16; volume for FY16 should remain stable.

Many glovemakers are facing utilities constraints for new facilities, especially for water supply. Management said each line requires more than 100 litres of water per minute.
For Riverstone, it has secured water supply up to phase 5 expansion in 2018 with the relevant authority. Riverstone said it might expand in locations with better water supply in future.

Riverstone and other Malaysia glove-makers have fallen around 3% this week, after Malaysia announced measures requiring its exporters to repatriate 75% of their foreign currency proceeds to boost external reserves.
We believe the selling is overdone as the move has a limited impact on Riverstone’s earnings. Its only USD-denominated cost is raw materials, which make up 30-35% of sales. Also, Riverstone could opt to procure from local raw material suppliers who transact in MYR.

Further strengthening of USD/MYR.
Further downside to key raw material prices, which are tied to oil prices.
Better-than-expected product mix upgrade and higher volume growth for high ASP high-margin cleanroom gloves.

Snap back of MYR against USD.
Sharp rebound of Butadiene price.
Slower-than-expected growth of cleanroom glove, which has higher ASP and margin.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-12-08

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 0.920 Same 0.920