Current Price S$0.76
Fair Value S$0.84
Helped by a favourable currency trend
Earnings in-line with expectation. Riverstone's 3Q13 net profit of US$15.7m was in line with our expectation; however the key variances were slightly lower-than-expected margin but offset by favourable RM0.8m forex gain. As expected, the group has further improved its utilisation rate to 91% in 3Q13 compared to 85% in 2Q13 and 76% in 1Q13.
Trimmed FY13 earnings estimates but kept fair value unchanged. While we understand from management its Thailand additional line (100m capacity) will be slightly delayed till 1Q next year and given its utilisation is almost fully utilised, as such, we trim our FY13 forecast by 6% but keep our FY14-15 estimates intact. We keep our fair value S$0.84 unchanged, still pegged at 12x FY14 PER despite its industry average has re-rated from 12x to 14x PER. Given management's good track record and prospects to re-rate, maintain Overweight.
Nitrile gloves still in strong demand. The global consumption for nitrile gloves is about 60bn pieces a year currently and market industry expects to increase by 12bn-18bn pieces or 20%-30% per annum. Malaysia's exports of nitrile gloves increased by about 25% last year and the bulk of the nitrile gloves demand is from hospitals, thanks to the growing health awareness in developing countries. Rivestone's largest nitrile glove rival, Hartalega is planning to increase average capacity by 15% p.a with current total installed capacity of 14bn gloves. Despite this, we believe Rivestone's 1bn additional capacity for next year will easily be absorbed by market demand.
3Q13 sales increased by 19% yoy to RM94m 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%). 3Q13 volume shipment reached 700m or up 33% yoy.
Gross profit margins improved by 3.6% pts yoy to 27.9% although its 3Q13 average selling price was lower than 2Q12. This is due mainly to favourable raw material prices and improved productivity. Including higher net interest and other investment income, pretax and net profit increased by 57% and 49% yoy, repectively.
Balance sheet remains strong. Riverstone generated RM20.6m positive free cash flow in 3Q13 after reducing its cash conversion cycle by 7 days qoq to 55 days as at end September quarter. As a result, net cash has increased to RM116m in 3Q13 from RM91m in the previous quarter.