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Riverstone Holdings - UOB Kay Hian 2017-05-05: 10b Glove Capacity Planned With Likely Order Commitment, Upgrade To BUY

Riverstone Holdings (RSTON SP) - UOB Kay Hian 2017-05-05: 10b Glove Capacity Planned With Likely Order Commitment; Upgrade To BUY RIVERSTONE HOLDINGS LIMITED RSTON SP AP4.SI

Riverstone Holdings (RSTON SP) - 10b Glove Capacity Planned With Likely Order Commitment; Upgrade To BUY

  • Riverstone surprised with solid 1Q17 results, driven by increased demand for its premium gloves. 
  • In line with the bright outlook for the tech industry, it raise expansion capacity to 10b pieces, which we opine to have likely obtained order commitment. 
  • We raise our 2017-19 net profit forecasts and upgrade the stock to BUY with a new target price of S$0.99, based on peers’ 2017 average PE of 17.2.



WHAT’S NEW


Surprisingly good 1Q17 results. 

  • Riverstone delivered surprisingly good 1Q17 results that were above our expectation, with a 38.7% yoy jump in revenue driven by increased demand for its premium gloves. 
  • Net profit rose 23.7% yoy despite a spike in raw material prices compressing gross margin from 29.1% in 1Q16 to 25.2% in 1Q17.

More expansion planned on increased glove demand. 

  • With Phase 4 of the Taiping expansion plan being carried out, Riverstone is expected to have an annual production capacity of 7.2b gloves by end-17. 
  • In view of the uptick in demand, another 1.5b glove production capacity will be added in Phase 5 by end-18. Phase 6 should add another 1.4b pieces by end-19, giving a grand total of 10b-piece annual production capacity.


STOCK IMPACT


Bright outlook in line with industry’s. 

  • Given the booming market in the supply chain of smartphones and Internet of Things devices, Riverstone has received a major boost to its cleanroom segment through the likes of mobile, tablet and LCD manufacturing customers. This has boosted our confidence in Riverstone’s outlook.

Likelihood of strong order commitment, given increased expansion. 

  • Notably, the company has revised its expansion plan upwards to have an eventual 10b-piece production capacity by end-19. 
  • Given Riverstone’s solid track record and our knowledge of management being conservative and down-to-earth, we reasonably suspect that the company has secured strong commitment from existing and new customers in taking up the additional capacity.


EARNINGS REVISION/RISK


Raise 2017-19 earnings forecasts. 

  • Given the additional capacity increase and likelihood of order commitment, we raise our 2017-19 net profit forecasts by 7.7%, 13.7% and 23.3% respectively.

High raw material prices pose pressure but likely to be mitigated. 

  • While the high raw material prices could prevent Riverstone from achieving our profit forecasts, ongoing production efficiency improvement and its strong pricing power for cleanroom gloves will, to a certain extent, mitigate such risks.


VALUATION/RECOMMENDATION


Upgrade to BUY with a new DCF-based target price of S$0.99. 

  • On the back of higher earnings, we upgrade the stock to BUY with a new target price of S$0.99, based on peers’ 2017 average PE of 17.2x.




Thai Wei Ying UOB Kay Hian | Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-05
UOB Kay Hian SGX Stock Analyst Report BUY Upgrade HOLD 0.99 Up 0.940



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