See important disclosures at the end of this report Powered by EFA TM Platform 1 Company Update, 29 September 2014 Riverstone Holdings (RSTON SP) Buy (Maintained) Consumer Non-cyclical - Rubber Products Target Price: SGD1.15 Market Cap: USD273m Price: SGD0.94 Capacity Set To Expand Macro Risks Growth Value 94 100 105 111 116 122 127 133 138 144 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05 Riverstone Holdings (RSTON SP) Price Close Relative to Straits Times Index (RHS) 1 2 3 4 5 6 Sep-13 Nov-13 Jan-14 Apr-14 Jun-14 Aug-14 Vol m Source: Bloomberg Avg Turnover (SGD/USD) 0.23m/0.19m Cons. Upside (%) 10.6 Upside (%) 23.0 52-wk Price low/high (SGD) 0.68 - 1.02 Free float (%) 32 Share outstanding (m) 371 Shareholders (%) Mr Wong Teek Son 50.8 Mr Lee Wai Keong 13.0 Share Performance (%) YTD 1m 3m 6m 12m Absolute 29.0 (1.6) (1.6) 15.4 33.6 Relative 25.1 (0.6) (2.0) 10.7 30.6 Shariah compliant Jarick Seet +65 6232 3891 [email protected]Terence Wong CFA +65 6232 3896 [email protected]Forecasts and Valuations Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Total turnover (MYRm) 273 310 358 401 481 Reported net profit (MYRm) 38.6 39.7 58.0 67.8 86.9 Recurring net profit (MYRm) 38.6 39.7 58.0 67.8 86.9 Recurring net profit growth (%) (4.4) 2.7 46.2 17.0 28.0 Recurring EPS (MYR) 0.12 0.12 0.16 0.18 0.23 DPS (MYR) 0.06 0.06 0.07 0.07 0.08 Recurring P/E (x) 19.7 19.7 15.0 13.1 10.2 P/B (x) 3.39 3.07 2.69 2.44 2.10 P/CF (x) 18.4 13.1 12.4 9.1 8.5 Dividend Yield (%) 2.5 2.5 2.8 2.9 3.1 EV/EBITDA (x) 13.1 11.3 8.4 7.2 5.6 Return on average equity (%) 18.2 16.6 20.1 19.7 22.0 Net debt to equity (%) net cash net cash net cash net cash net cash Our vs consensus EPS (adjusted) (%) 0.0 0.0 Source: Company data, OSK-DMG We recently visited Riverstone's new facility in Taiping, Malaysia. Production will start with two lines in October, before two more are added each in November and December to reach a 1bn capacity. While its competitors have been aggressively expanding capacity and its costs have risen in 3Q, we remain positive on Riverstone's expansion plan and execution capabilities. Maintain BUY with a SGD1.15 TP (22% upside to the current share price), based on a 16.3x FY14 P/E. Phase 1 to add 1bn capacity by end-FY14. Riverstone’s new facility, Phase 1, will add another c.1bn (25%) in capacity, bringing its total capacity to 4.2bn from 3.2bn annually. It consists of six lines – three single and three double lines – with two single lines to commence production in October, and one single and one double each in November and December. From FY15 onwards, the product mix of this new facility will likely be 80% for healthcare and 20% for clean room. Orders for three lines in hand. Riverstone has already secured orders for half of its production lines for Phase 1, with three new customers from Germany, the US and Japan – having signed fixed contracts for two years to take up one line each. However, both parties can exit the contract after six months if either side is not contented, provided that six months’ notice is given. This means for its three lines, its production capacity has been fully taken up for at least a year. Potential headwinds ahead in 3Q14. With the big four Malaysian glove makers aggressively expanding capacity, we expect intense competition to pressure ASPs. In addition, additional costs for the new plant would be incurred in Q3, with no production as yet since it has to hire and train new workers first. Still, we expect its 4Q performance to make up for any potential shortfall in 3Q earnings. Maintain BUY with a SGD1.15 TP. Jarick Seet takes over coverage of Riverstone with this research note. We are excited and remain positive over its expansion plans ahead. Phase 2 of its expansion, which may cost up to MYR50m, could add another 1bn to its total capacity. Phase 2 is already 30%-completed so far, and full production is slated to commence by end-FY15. Maintain BUY, with a SGD1.15 TP.
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See important disclosures at the end of this report Powered by EFATM
Forecasts and Valuations Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F
Total turnover (MYRm) 273 310 358 401 481
Reported net profit (MYRm) 38.6 39.7 58.0 67.8 86.9
Recurring net profit (MYRm) 38.6 39.7 58.0 67.8 86.9
Recurring net profit growth (%) (4.4) 2.7 46.2 17.0 28.0
Recurring EPS (MYR) 0.12 0.12 0.16 0.18 0.23
DPS (MYR) 0.06 0.06 0.07 0.07 0.08
Recurring P/E (x) 19.7 19.7 15.0 13.1 10.2
P/B (x) 3.39 3.07 2.69 2.44 2.10
P/CF (x) 18.4 13.1 12.4 9.1 8.5
Dividend Yield (%) 2.5 2.5 2.8 2.9 3.1
EV/EBITDA (x) 13.1 11.3 8.4 7.2 5.6
Return on average equity (%) 18.2 16.6 20.1 19.7 22.0
Net debt to equity (%) net cash net cash net cash net cash net cash
Our vs consensus EPS (adjusted) (%) 0.0 0.0
Source: Company data, OSK-DMG
We recently visited Riverstone's new facility in Taiping, Malaysia. Production will start with two lines in October, before two more are added each in November and December to reach a 1bn capacity. While its competitors have been aggressively expanding capacity and its costs have risen in 3Q, we remain positive on Riverstone's expansion plan and execution capabilities. Maintain BUY with a SGD1.15 TP (22% upside to the current share price), based on a 16.3x FY14 P/E.
Phase 1 to add 1bn capacity by end-FY14. Riverstone’s new facility,
Phase 1, will add another c.1bn (25%) in capacity, bringing its total capacity to 4.2bn from 3.2bn annually. It consists of six lines – three single and three double lines – with two single lines to commence production in October, and one single and one double each in November and December. From FY15 onwards, the product mix of this new facility will likely be 80% for healthcare and 20% for clean room.
Orders for three lines in hand. Riverstone has already secured orders for half of its production lines for Phase 1, with three new customers from Germany, the US and Japan – having signed fixed contracts for two years to take up one line each. However, both parties can exit the contract after six months if either side is not contented, provided that six months’ notice is given. This means for its three lines, its production capacity has been fully taken up for at least a year.
Potential headwinds ahead in 3Q14. With the big four Malaysian glove makers aggressively expanding capacity, we expect intense competition to pressure ASPs. In addition, additional costs for the new plant would be incurred in Q3, with no production as yet since it has to hire and train new workers first. Still, we expect its 4Q performance to make up for any potential shortfall in 3Q earnings.
Maintain BUY with a SGD1.15 TP. Jarick Seet takes over coverage of Riverstone with this research note. We are excited and remain positive over its expansion plans ahead. Phase 2 of its expansion, which may cost up to MYR50m, could add another 1bn to its total capacity. Phase 2 is already 30%-completed so far, and full production is slated to commence by end-FY15. Maintain BUY, with a SGD1.15 TP.
Return on average assets (%) 15.2 13.6 16.6 16.3 17.7
Return on average equity (%) 18.2 16.6 20.1 19.7 22.0
Net debt to equity (%) (18.6) (25.1) (35.3) (31.7) (31.1)
DPS 0.06 0.06 0.07 0.07 0.08
Recurrent cash flow per share 0.13 0.18 0.19 0.26 0.28
Source: Company data, OSK-DMG
Riverstone Holdings (RSTON SP)
27 September 2014
See important disclosures at the end of this report 7
SWOT Analysis
Niche business provides a wide moat
Sound management ensures solid financial health
Enlarging capacity provides growth opportunities and economies of scale
Rising cost of production
Increasing pricing pressure
Exposure to forex volatility
Demand for cleanroom gloves should stay healthy given the company’s niche in the premium market
Demand for healthcare gloves is expected to grow exponentially, driven by European customers diversifying their supplier bases
Expansion of its healthcare gloves capacity may give rise to pricing pressure
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P/E (x) vs EPS growth
P/E (x) (lhs) EPS growth (rhs)
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P/BV (x) vs ROAE
P/B (x) (lhs) Return on average equity (rhs)
Source: Company data, OSK-DMG Source: Company data, OSK-DMG
Company Profile Riverstone Holdings specialises in producing and selling nitrile gloves used for clean-room manufacturing and the healthcare industry.
Riverstone Holdings (RSTON SP)
27 September 2014
See important disclosures at the end of this report 8
Recommendation Chart
0.29
0.39
0.49
0.59
0.69
0.79
0.89
0.99
1.09
Oct-09 Jan-11 Apr-12 Jul-13
Price Close
na
1.0
5
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7
1.1
5 Recommendations & Target Price
Buy Neutral Sell Trading Buy Take Profit Not Rated
Source: OSK-DMG, Bloomberg
Date Recommendation Target Price Price
2014-05-07 Buy 1.15 0.86
2014-02-27 Buy 1.07 0.79
2013-11-04 Buy 1.05 0.75
Source : OSK-DMG, Bloomberg
9
RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months
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Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage
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DMG & Partners Research Guide to Investment Ratings
Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage
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