SINGAPORE (Nov 5): Riverstone on Nov 1 announced a 6.5% drop in 3Q18 earnings to RM32.1 million ($10.6 million) from RM34.3 million in 3Q17, due to higher cost of sales.

Demand for the group’s cleanroom and healthcare gloves continue to grow in tandem with its capacity expansion plans, as an uptick in glove orders contributed to an increase in revenue for the quarter of 27.5% to RM239.5 million from RM187.8 million.

Cost of sales increased by 41.2% y-o-y to RM193.4 million, bringing 3Q18 gross profit to RM46.1 million, 9.2% lower than RM50.8 million a year ago.

On the outlook, Wong Teek Son, executive chairman and CEO of Riverstone, says, “With phase 6 of our expansion plans poised to lift annual production capacity by a further 1.4 billion to a total of 10.4 billion pieces of gloves by end-FY2019, we are well-positioned to tap on growing global demand for both our healthcare and cleanroom gloves. While we continue to chart our upward growth trajectory, we are also committed to employing prudent cost controls and adopting automation to mitigate the impact of volatile raw material prices and foreign exchange fluctuations, both of which continue to remain a challenge for the Group.”

Following this announcement, CGS-CIMB is keeping its “add” recommendation on Riverstone with a target price of $1.30.

Despite stronger revenue, the group’s 3Q18 results disappointed amid temporary cost issues stemming from shortage of raw materials and labour.

In a Friday report, analyst Colin Tan says, “We understand from management that the surge in butadiene costs (up about US$400/tonne in 3Q18) stemmed from strong demand for nitrile which led to shortage of rawmat supply during the quarter. Costs has come down by over US$100/tonne since Sept.”

Meanwhile, the group has also secured additional foreign workers since then, easing its manpower shortage.

The group is currently on track to grow its total annual production capacity to 9 billion gloves by end-FY18. It also has new glove orders already secured until Jan 2019 to sustain optimal production utilisation.

During the quarter, the volume mix between cleanroom and healthcare gloves was 17:83 and the group expects to maintain this ratio with its newly added capacity and new orders.

On the other hand, US has recently cited new healthcare regulations that require workers to don two pairs of gloves instead of one when handling hazardous drugs.

“The new standards will take effect in Dec 2019 and could add to Riverstone’s glove orders in 3Q/4Q19F,” says Tan.

As at 10.55am, shares in Riverstone are trading at $1.17 or 3.20 times FY19 book with a dividend yield of 2.55%.