Strong 3Q Numbers, Expect Record Profit
Intrinsic Value S$0.825
Prev Closing S$0.760
Riverstone Holdings Ltd (Riverstone) released its 3Q FY13 results with an 18.9% YoY increase in revenue to RM93.9m and a 49.3% YoY increase in PAT to RM15.7m. The increase in revenue was mainly due to a 34% YoY increase in sales volume. The increase in PAT was also boosted by external factors such as the depreciation of the MYR against USD and lower raw material prices, and internal factors such as higher utilization and productivity rates.
While Riverstone remains debt-free, we forecast the company to take on borrowings after end FY15 for their expansion plans in Taiping, as their internal cash will probably run out over the next two years. The company has a projected RM400m capex plan over the next five years. For the first two years, approximately RM120m will be spent.
As prices of raw materials and exchange rates have begun to stabilize, we forecast a decrease in 4Q FY13 PAT to RM12.2m, bringing FY13 PAT to RM54.1m, the highest level for Riverstone. The new plant could increase production capacity to 4.1b pair of gloves by end 2014 and 5.1b by end 2015. For now, we only include two years of capacity growth into our model as we keep a lookout on the possibility of industry oversupply. That said, our revised model values Riverstone at S$0.825. Recommend Invest.
Results Summary: Revenue continued to grow on the back of increased production capacity of 708m pairs of gloves last quarter, with utilization rates staying high at 91%. Gross margin increased by 3.6% YoY to 27.9% on the back of weakening exchange rates for MYR to USD (from 1USD: MYR3.16 in end June to 1USD:MYR3.26 in end September), lower material costs and higher productivity.
New labour regulations and the increase in hiring of mid-level management staff for the company’s expansion plan pushed up general and administrative expenses to RM4.5m as compared to RM3.7 YoY. Riverstone remains debt-free with their cash and equivalents increasing to RM116.3m due to higher cash flows from operating activities at RM24.5m, warrants conversion of RM2.7m to ordinary shares and lower capital expenditures of -RM3.9m.
Company Update: Riverstone has commenced the first phase of expansion on a 30 acre site in Taiping. The first phase is expected to cost the company RM80m, with the subsequent phases to cost around RM40+m. We estimate the total costs to be around RM400m. While the company’s current cash position is sufficient for the first two phases, we expect Riverstone to dip into the debt market for additional financing in the later phases of the expansion.
The new plant will see more automation for the production lines as the company reduces its reliance on foreign labour. The company’s efforts to improve operational efficiencies in the past few quarters have helped mitigate the effects of minimum wage and higher foreign levy.
Currently, 20% of the cleanroom gloves produced is sold to the mobile phone and tablet sector. Sales volume to this sector is likely to grow as demand starts to pick up and buyers start to search for the most optimal gloves which has lesser corrosion and electrostatic charge. Margins for these gloves are comparable to the cleanroom gloves produced for sectors such as the hard disk drive (HDD) production sector.
Industry update: While raw material prices have declined for the past few months, prices have begun to stabilize. Similarly, the depreciation of MYR against USD has also ceased over the last two months. Thus, the positive impact from external factors may cease in FY14.
Valuation and forecasts: We have revised production capacity in FY14F and FY15F in view of the expansion capacity. We will add the subsequent expansion phases into our valuation model after we see high utilization rate from the new lines. We set the selling prices and gross margin at around the three-year average level and continued to assume zero gearing for the period. The resultant valuation is an intrinsic value of S$0.825. Recommend Invest.
Publish date: 11/11/13