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

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


Site visit to Taiping plants in Malaysia 

  • 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.


Capacity expansion on track and strong demand 

  • 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.


Water supply key constraint for new capacity 

  • 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.


Limited impact from forex repatriation policy 

  • 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.



Swing Factors


Upside

  • 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.

Downside

  • 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






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