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  • Bryan Tan

Riverstone Holdings | 1Q20 Business Update

Updated: Jun 14

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Key Points

  • 1Q20 results mainly driven by volume growth rather than ASP. We expect ASP growth to materialise in the upcoming quarters


  • Raw material prices have resumed their downward trend since our last article. This bodes well for gross margins moving forward


  • Order book remains filled until the end of the year, providing clear earnings visibility for FY20

Last night, Riverstone put out a voluntary business update for 1Q20. The results exceeded our expectations on multiple fronts. We also had the opportunity to partake in Riverstone’s earnings call today and we have penned down our observations and takeaways in this post.


Revenue climbed 16.2% to RM279.4m on the back of robust sales volume growth in both cleanroom and healthcare segments. In their update, management also reaffirmed that the healthcare segment benefited significantly from tailwinds from COVID-19 as global glove demand skyrocketed. Notably, management commented that the higher revenue was largely driven by volume expansion rather than ASP growth.


Gross profit surged 44.0% to RM67.1m supported by lower raw material costs. Accordingly, gross margin expanded by 4.6 percentage points to 24.0%. As illustrated in our earlier article, we estimated that raw material costs like Butadiene and Acrylonitrile constitute ~46% of total operating costs. With a large portion of operating costs tied up to raw materials, Riverstone stands to reap significant cost savings from falling prices.


Net profit swelled 54.3% to RM46.6m, accompanied by higher net margin of 16.7% (+4.1 percentage points). The higher net profit was a result of operating leverage and FX gains.


As a testament to Riverstone’s cash-generative business model, its cash pile further strengthened to RM170.7m (FY19: RM130.4m).


On outlook, Riverstone updated that it remains on track to add 1.4b in glove capacity by 4Q20, which would take yearly capacity to 10.4 billion pieces (+15.6% y-o-y). This should help alleviate the supply pressure faced by the group against the backdrop of overwhelming demand.

Our view on Riverstone's outlook


1Q20’s stellar results could be surpassed by stronger performance in the upcoming quarters.


This could manifest in several ways:


1) Heightened demand from the USA and Europe could surface in the 2Q20 print

Based on FY19 figures, the bulk of Riverstone’s revenue came from the USA (19.0%) and Europe (32.3%), which only began to declare states of emergency and implement lockdowns in March. Given that the healthcare situations in the USA and Europe have escalated since then, we should expect the effect of demand growth to be shown in the upcoming quarters. Additionally, management highlighted that its order book is filled until the end of the year, with recent customers having to wait until 2021 to receive their orders. Moreover, given that we have not seen ASP increases thus far, Riverstone could also raise prices in 2Q20, in line with demand growth. This would further bolster its topline moving forward.


2) The bulk of Riverstone’s raw material cost savings should materialise from 2Q20 onwards For the most of the first quarter, oil prices were on a slow downtrend before plummeting on 8th March 2020 after Saudi Arabia initiated a price war with Russia. Being derivatives of crude, Butadiene and Acrylonitrile also saw significant price declines towards the end of 1Q20. Given that prices have remained well below pre-crisis levels, Riverstone should see more meaningful cost savings at least for the upcoming quarter.



3) Post-pandemic demand should remain intact

Management has indicated that hospitals have been drawing down on their safety stocks for personal protection equipment throughout the outbreak. As hygiene and sanitation standards are raised, we opine that hospitals might still need to rebuild their stockpile of personal protection equipment post-COVID-19. Accordingly, Riverstone could see sustained demand for healthcare gloves even after FY20.

Downside Risks


1) Commodity price spikes

Saudi Arabia recently announced that it would cut output by a further 1m bpd to stabilise global oil markets. Should we see a rise in raw material prices, it might erode potential cost savings.

2) Execution risks

Malaysia’s new COVID-19 cases resumed its upward trend as of 11th May 2020, with 70 new cases being reported. Should any of Riverstone’s production staff in Malaysia contract the virus, it could cause labour disruptions and heightened sanitation procedures. This could result in production line downtimes, lower utilisation rates as well as increased operating costs.

3) De-escalation of the global COVID-19 pandemic

The abatement of the virus could dampen demand for medical gloves as the healthcare situation improves. As much as we wish for the situation to improve, experts’ opinions have pointed to a drawn-out fight that could last 18-24 months.

Valuation



As of writing, Riverstone's price has risen above the price targets of all four sell-side analysts covering the stock. Given the strong outlook and earnings visibility, we believe we could see upgrades to current price targets.


If we were to speculate on what could their revised price targets be, we opine they would be within the range of $1.80 - $2.00. This implies a FY20 Forward P/E of between 18-20x based on our forecasted earnings model, which remains within the realm of reasonableness in our view.

Conclusion

Since our last article on 26th April 2020, Riverstone has risen from $1.19 to reach $1.62 at the time of writing, marking a 36.1% increase in 10 trading days. The current quarter gave us a glimpse of the impact of the pandemic on Riverstone's business. That said, even as outlook remains positive, we are cognizant of possible downside risks that might play out given the huge run-up in share price. As such, we will continue to monitor developments in the COVID-19 narrative and its possible effects on Riverstone. Nevertheless, our long-term investment thesis remains intact.


Thanks for reading,

Bryan and Jin Koi

Disclaimer: We are long Riverstone at an average price of $1.05. This is not a buy recommendation, this is only for educational and discussion purposes.


Cover photo source: Charles Pertwee/Bloomberg

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