Riverstone Holdings - DBS Research 2020-02-27: Capacity Expansion To Propel Growth


Riverstone Holdings - Capacity Expansion To Propel Growth

  • Riverstone's FY19 earnings slightly below on higher tax rate.
  • Production capacity to increase 15.6% in 2020.
  • Higher tax rate assumption offset by stable ASPs.
  • Maintain BUY and Target Price of S$1.34.

FY19 earnings slightly below on higher tax rate

Higher tax rate in 4Q19; net profit down 10% q-o-q.

  • In 4Q19, Riverstone Holdings (SGX:AP4)'s total revenue was flat at RM257.4m while gross profit improved by 7.9% y-o-y to RM52.6m. Gross margin of 20.4% is comparable to 20.5% in 3Q19 but better than 18.9% in 4Q18. A higher effective tax rate of 23%, vs 15- 16% in the last three quarters led to a 10% q-o-q (-3% y-o-y) drop in net profit to RM32.1m.

Weaker FY19 gross margin on lower ASP for healthcare gloves and change in product mix.

  • FY19 revenue rose 7.4% y-o-y to RM989m, attributable to higher sales volumes for both its cleanroom and healthcare glove segments. While gross profit recorded a 4.7% y-o-y increase to RM198.9m for FY19, the Group’s gross profit margin contracted marginally by 0.5 percentage points to 20.1%, mainly due to a decrease in average selling price of healthcare gloves and a change in product mix.
  • Apart from growing competition within the healthcare glove space, average selling prices were revised downwards due to down-trending raw material prices as the Group adopts a cost-plus pricing model. We have already factored in lower margins in our forecasts.

Higher effective tax rate.

  • Riverstone’s effective tax rate was higher at 17.2% in FY19 compared to 14.2% in FY18 due to the expiration of the reinvestment allowances of existing projects and the delay of phase 6 expansion to 2020, from end-2019. The Group can only claim reimbursement allowance upon the commencement of production. Overall, net profit of RM130.4 was flat for FY19, 5% below our forecasts.
  • A final DPS of 5.85 sen was declared, bringing total dividends to 7.4 sen for FY19 (FY2018: 6.75 sen).

Strong balance sheet.

  • Supported by strong operating cash flows of RM167.8m, Riverstone’s balance sheet remains resilient with a net cash position of RM117.4m (FY2018: RM77.0m).

Production capacity to increase 15.6% in 2020.

  • Phase 6 of the Group’s expansion plans is on track to lift capacity by up to 1.4bn to a total of 10.4bn pieces of gloves per annum, representing a growth rate of 15.6%, to cater to the increasing demand. Out of a total of six lines, two are already in production and the remaining lines are expected to be ready by mid-2020.
  • Moving beyond phase 6, plans are already underway following the group’s acquisition of a 3.8-acre land bank in Taiping where Riverstone intends to construct its new facility and expand capacity further.

Impact on COVID-19 short term; longer-term focus on CR segment.

  • Riverstone has received more enquiries on its HC gloves and face masks, which the group produces for its cleanroom customers, though face masks, together with other cleanroom products, only account for 1-2% of total revenue. Only one out of its five manufacturing plants is in China which contributed only 5% of total FY19 revenue, based on location of customers, and 3% based on location of assets.
  • Overall, the impact from COVID-19 is expected to be short term. In the longer run, the HC segment remains competitive with many players in this segment. Thus, Riverstone is shifting its focus to the CR segment, where it is the industry leader with about 40-50% market share.

Higher tax rate assumption offset by stable ASPs.

  • We have imputed a higher tax rate for FY20F and FY21F. We expect average selling price (ASP) for both HC and CR to be more stable now (vs a declining trend in the last few quarters), as raw material prices and other costs items such as labour and utilities are not expected to see a steep increase.
  • Overall, there are no changes in our forecasts as the higher tax rate assumption is offset by a more stable ASP trend.

Maintain BUY and Target Price of S$1.34.

Lee Keng Ling DBS Group Research | https://www.dbsvickers.com/ 2020-02-27
SGX Stock Analyst Report BUY MAINTAIN BUY 1.340 SAME 1.340