Riverstone Holdings (SGX: AP4) reported its 2019 second-quarter results yesterday. Despite net profit being down slightly, there were some signs of improvement.
Here are three reasons I think investors should continue to be patient with the company.
Gross profit margin improving sequentially
Riverstone’s gross profit margin declined 2.4 percentage points from a year ago. This has been a recurrent theme over the past few quarters.
There are three main reasons for this margin fall:
- A change in product mix leaning more toward lower-margin healthcare gloves instead of cleanroom gloves.
- Intense competition from China glove producers pushing average selling prices down.
- Higher labour costs due to Malaysia’s new minimum wage laws.
All of these things have squeezed Riverstone’s margins.
However, it was heartening to see that despite year-on-year declines in gross margin, Riverstone has managed to improve its gross margins sequentially since the fourth quarter of 2018.
Gross profit margins improved 0.5 percentage points in the first quarter of 2019 and 0.7 percentage points in the current quarter.
While margins have been declining, the group’s capacity has increased steadily.
Co-founder and CEO Teek Son Wong said:
“Following the completion of construction of our new plant for phase 6 of our capacity expansion plans, we will be commissioning production lines progressively over the remainder of the year. This will lift our total annual production capacity from 9.0 billion pieces of gloves up to 10.4 billion pieces by 1QFY2020.”
The increased capacity along with strong demand for the company’s products will likely lead to sustained revenue growth.
Despite gross margin being squeezed over the past few years, resulting in profit growth slower than revenue growth, I believe profit will more closely track sales growth when margins in the future.
Robust financial position and cash-generating business
Lastly, Riverstone remains a cash-generative business and operates in a growing industry. The group generated RM22.3 million from operations and sits on RM76.36 million in net cash.
Moreover, demand for healthcare and cleanroom gloves is growing each year. This means that Riverstone can easily utilise its expanded capacity when it comes on board.
The Foolish bottom line
Despite the disappointing drop in net profit, there are some indicators that Riverstone could see a nice improvement in the second half of the year. Gross profit margins have been trending upwards and will be compared against a relatively low base of 2018.
On top of that, the expansion to 10.4 billion-piece capacity is on track and is expected to be commissioned progressively over the next three quarters.
Earnings per share also increased sequentially from RM 4.08 sen in the first quarter to RM 4.39 sen in the second quarter.
As such, investors should continue to give Riverstone time to prove its worth.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Riverstone Holdings. Motley Fool Singapore contributor Jeremy Chia owns shares in Riverstone Holdings.