550_3QFY2014_11.14At its 3QFY2014 results briefing, leading glove maker Riverstone provided insights to its progress under intense competition.

Photos by Sim Kih

ANALYSTS ISSUED mainly 'Buy' calls on leading glove maker Riverstone after it posted record quarterly earnings for 3QFY2014 on Tuesday.

Maybank Kim Eng, RHB Research and UOBKH, which had 'Buy' recommendations, set target prices ranging from S$1.09 to S$1.21 for Riverstone, translating into upside of up to 26% based on Thursday's close price of 96 cents.

"Riverstone expects to penetrate the fast-growing nitrile healthcare glove segment further while maintaining its leadership in lucrative cleanroom gloves. Backed by full orders for its new capacity, we see little downside risk to our 19% EPS growth forecast for FY15E.

"Riverstone’s 12x FY15E P/E trails peers’ 15x average although it is on track for the strongest growth, highest dividend yields and second-highest margins, in our view. Maintain BUY with no change to our SGD1.21 TP, based on 15x FY15E EPS, its peer average."

John Cheong / Gregory Yap, Maybank Kim Eng analysts 

Riverstone_ANR_7.11.14Bloomberg data

The highlights for 3QFY2014 results are:
>> Group revenue grew 9.2% year-on-year to reach RM 102.7 million, a record high.
>> Net profit grew 5.2% to reach RM 16.5 million, also a record high.
>> Net cash position decreased by 23% and remains strong at RM 87.5 million with no borrowings.

Production capacity expansion

The Group had a production capacity for 3.1 billion gloves in 2013. It expects this will increase by 35% to 4.2 billion at the end of this year.

It has secured orders for four out of six new production lines and has commenced production with them.

400_Wong_Teek_Son_11.14Executive chairman and CEO Wong Teek Son (left) provided investors with further details after the briefing.Below is a summary of questions raised at its results briefing on Wednesday and the answers provided by CEO Wong Teek Son and CFO Lim Sing Poew.

Q: What capex do you expect for the coming quarter?

Our capex will come close to RM 80 million this year for phase one and RM 50 million next year for phase two of production expansion.

Total capex has been budgeted at RM 440 million for 5 phases of production expansion.

Q: You did not generate any free cash flow as your capex was higher than operating cash flow. Will that be an issue next year?

Our capex in 2015 budgeted at RM 50 million is less than our expected cash flow from operations. 

300_Lim_Sing_Poew_11.14CFO Lim Sing Poew
Q: Why are you expanding at a time when competition is very keen?

The global market currently consists of about 170 billion gloves a year, comprising of latex gloves, nitrile gloves and PVC gloves. We expect this market to grow about 10% a year.

Some countries, such as in the UK, are replacing natural latex gloves with nitrile gloves because of the allergy problems caused by natural rubber.  In the US, more than 70% of glove users converted to nitrile gloves, and this conversion continues.

The third world countries are still using natural latex gloves because it has traditionally been less costly. However, the cost of nitrile gloves has been coming down. So, I don’t see any cost advantage to using one or the other.

In the past, natural rubber gloves were more popular because of its comfort. As technology improved, nitrile gloves have become thinner, and more popular.

Because of the decreasing cost and increasing comfort level in new nitrile gloves, most of the market's capacity growth has been for nitrile gloves. We believe that the new market capacity has been increasing faster than demand.
To mitigate risks, we only expand capacity after securing orders.
Q: How has ASP changed for your gloves?

There has been no price change for our cleanroom gloves. The ASP for health care gloves has come down about 3% to 4% year-to-date. We are selling slightly higher than the competition because we have some customization. The customization also means our cost of production is higher.
Q: Do you face risk of losing market share because of your higher prices?

The customer is reliant on us because of our customization service. If they change supplier, the glove development process needs to be redone and this will take them time and money. Most glove users don't change suppliers.
Q: What kind of customization do you do for healthcare gloves?

Standard gloves can be stretched 500% without breakage. Our customized gloves can stretch 700% without breakage. This improves the comfort and durability of the gloves. We sell this at a premium price. We developed the product and promoted it to specific customers. We only sell this type of gloves to selected customers to maintain our price premium.

Recent stories:

RIVERSTONE: Buy With $1.21 Target, Says Maybank Initiation Report

RIVERSTONE: Ramping Up Production By 1 Billion Gloves A Year (+31% Y-O-Y)

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