Recently, I wrote an article on why Riverstone Holdings Limited (SGX: AP4) is an important fit in my portfolio.
However, as with any investment, the company also faces challenges that may derail its growth. Here are two key risks and the scenarios where I may be forced to reconsider my position in the company.
Risk 1: Narrowing margins
My investment thesis is built upon Riverstone’s growing capacity. However, the growing capacity may not be enough to improve its earnings if margins continue to be pressured.
Glove manufacturers in Malaysia have seen margins squeezed as heavy competition from China has forced average selling prices down.
Like it or not, rubber gloves are effectively a commodity good. As such, glove manufacturers have little pricing power.
Riverstone has already felt the impact of narrowing margins in recent years. In the most recent quarter, gross margin was 20.1%, compared to 22.5% a year ago. As such, despite an increase in revenue, gross profit was unchanged, while earnings per share declined by 3.1%.
Risk 2: Currency fluctuation
Another risk that is beyond the control of the company is fluctuations in currency. As an investor in Singapore, I am more concerned about the company’s growth in Singapore-denominated profits and dividends.
If the Malaysian ringgit declines against the Singapore dollar, it will be a drag on the company’s Singapore-dollar denominated profits and dividends.
The company also sells its products around the world. Changes in currency prices may result in lower average selling prices, which compounds its currency risk.
A scenario in which I may have to sell
As for now, I intend to keep Riverstone Holdings in my portfolio. However, things could change.
If the Malaysian ringgit slides against the Singapore dollar, Riverstone’s dividend in Singapore dollar terms will be pressured.
In addition, I will be keeping a close eye on its gross margins. If margins continue to be squeezed and I see that the rubber glove industry is becoming too competitive, I may be forced to reconsider my position in the company.
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.