Current Price S$0.63
Fair Value S$0.84
Against all odds
Earnings above expectation. Though 2Q13 revenue was in line with our expectation; its net profit of RM14.2m (+31% yoy) came in 25% above forecast due mainly to better gross profit margins and RM1m net forex gain.
Still growing despite tough market competition. While its expansion plan will only come onstream 3Q14, we believe the group is still able to achieve growth for these two years at its top and bottom line through better utilisation rate and cost control.
Management expects to increase another 100m capacity by end of this year and 1bn by end 2014. The group operated at 85% of its capacity in 2Q13 compared to 76% in 1Q13, and management expects its utilisation rate can improve further to above 90% for 2H13. We continue to like its conservative expansion plan and good cash flow management. Management is also committed to maintain its 40-50% payout ratio.
Raise earnings estimates and fair value. When completed, the multi-phase expansion will increase current capacity by 1.5 times. This will position the group well for further growth. We have raised our FY13-15 net profit estimates by 21-32% to factor in better-than-expected gross profit margins. We also roll forward our base from FY13 to FY14, still pegged at 12x PER (in line with the industry average), as a result, our fair value is raised from S$0.67 to S$0.84. Given the good prospects from the expansion plans and 32% potential upside, we maintain our Overweight rating.
2Q13 sales increased by 15.5% yoy to RM90.4m due to better utilization rate as well as higher sales contributed from its medical gloves, which came on-stream with its new added production capacity of 600m gloves in December last year (+25%). 2Q13 volume shipment reached 660m or up 32% yoy, better than the group’s capacity expansion.
Gross profit margins improved by 5.1% pts yoy to 26.7% although its 2Q13 average selling price was lower than 2Q12. This is due mainly to favourable raw material prices and improved productivity. EBITDA margins improved only 3.8% pts yoy to 23.9% due mainly to the increase in payroll cost.
Balance sheet remains strong. Riverstone generated RM4.7m positive free cash flow in 2Q13 despite increasing its cash conversion cycle by 7 days qoq to 62 days as at end June quarter. Including RM9m pursuant to the exercise of the warrants and Rm14m cash dividend paid, net cash has reduced by Rm2m from RM93m in 1Q13 to RM91m in the end June quarter. Riverstone declared an interim dividend of 2.3 Malaysia sen, 1 ct higher than last year.
Publish date: 05/08/13