Earnings of Riverstone Holdings soared 119.3% to RM137.5 million ($27.1 million) in 1H2020 ended June, from RM62.7 million a year ago, thanks to heightened demand for personal protective gear during the Covid-19 pandemic.
This translates to earnings per share of 18.56 sens on a fully diluted basis compared to 8.47 sens in 1H2019.
With stronger sales of healthcare examination gloves, cleanroom gloves and facemasks, the company reported a 30.5% increase in revenue to RM626.7 million in the first six months of the year.
The robust sales also brought an 11.3% increase in the cost of sales to RM429.0 million. This follows a 9% increase in selling and distribution expenses to RM9.3 million in 1H2020, the company reported in its results announcement on August 5.
Even so, Riverstone posted a stronger margin with its gross profit improving from 19.8% to 31.6%, following higher average selling prices (ASPs) of personal protective gear.
This has boosted the company’s net cash position, with cash and cash equivalents standing at RM264.2 million as at June 30. In this time, its net operating cash flows were up to RM222.2 million from RM73.0 million a year ago, while bank borrowings stood at RM10 million.
Riverstone has declared an interim dividend of 4 sens, to reward shareholders and as a mark of confidence in the group’s outlook. This is up from the 1.55 sens disbursed in the same period last year.
As for the group’s outlook, executive chairman and CEO Wong Teek Son says the focus will be on internal initiatives such as adopting automation to improve productivity and reducing reliance on labour.
“Our in-house R&D team continues to monitor industry trends closely and develop new products that will allow us to venture into untapped markets including the food processing, pharmaceutical and surgical glove segments,” he adds.
As for the group’s cleanroom glove segment, Wong is keen to build on its reputation as a “technological front-runner” to deliver “highly customised solutions and cutting-edge products”.
Wong’s plans are timely given the heightened awareness on hygiene and the corresponding increase in the usage of gloves both in the medical and non-medical sectors.
In fact, the Malaysian Rubber Glove Manufacturers Association estimates rubber globe demand growth to be robust at 11%, such that approximately 330 billion products are produced.
To ride this wave, Wong says his expansion plans are “on track” with Phase 6 scheduled for completion in 4QFY2020. Under this, the company plans to raise capacity by up to 1.4 billion, such that it can produce 10.4 billion glove pieces in a year.
For the longer-term, he has a three-year expansion plan for Riverstone’s new production site in Taiping, Malaysia. Through this, he hopes to bring production capacity to 14.0 – 15.0 pieces of gloves by FY2023.
Looking ahead, DBS Research Group analyst Lee Keng Ling expects earnings for 2H2020 to be “even stronger”, as the company benefits fully from the higher ASPs and margins.
“We expect the ASP uptrend to continue till December, vs our earlier expectation of ASP plateauing from September,” Lee says in an August 6 note.
Further increases in ASPs and demand for gloves may well be seen as the world experiences a resurgence of Covid-19 cases and a second waves as countries ease their lockdowns.
“We have imputed a 50% y-o-y increase in ASP for healthcare gloves and 10% for the cleanroom segment in FY20F, and flat for both in FY21F. Gross margin is projected to further rise to 38% in FY20F and FY21F, from 35%, as ASP hikes more than offset the slight increase in costs,” asserts Lee.
To this end, she has raised her FY20/21F earnings forecast by 10% and 13% respectively. The counter’s current price-to-earnings of 23.7 times sees it trading at a 40% discount to its peers, observes Ling.
She is maintaining her “buy” call on Riverstone at a revised target price of $5.51. This is believed to give the counter a 31% upside from her previous $3.90 call. It also a 23.6% upside from the counter’s $4.21 close on August 5.
Shares of Riverstone Holdings were down 15 cents or 3.56% to $4.06 at 9.34am.