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Long Term Value Pick 2020 : Riverstone Holdings Ltd. (Fair Value SGD $4.83)
Most
readers know that I called Riverstone Holdings Ltd first back in end
2019. Since calling entry of Riverstone at 90 sens and adding more
subsequently at 70+ sens during March plunge, the share price has
climbed in tandem with industry tail wind and Covid-19 pandemic all the
way to SGD $4.21 at today's closing.
It
was never within my expectation for such a steep ascend but I can
safely say, I have yet to sell a single share of Riverstone until today.
If anything, this investment has taught me the power of sitting on
profits and riding it through the market noises and gyrations. Once you
find a winner, stick with it provided you understand the company well.
I was holding my breathe with this coming announcement. Most know that I am not one to shout about or promote heavily on my stock picks. I would like to share with all my commentaries as part of my continuous responsibility of keeping my readers updated.
Q2 results is announced as 1H2020 as under SGX new ruling, companies need not to quarterly updates. However, the management has always remained with quarterly business updated. This time, the results announced is part of their regulatory requirement.
In summary, Riverstone's result is nothing short of spectacular. Despite the share price climbing all the way to $4.21 closing today (almost 5x), expectations were high going into the results. Yet, Riverstone delivered on all cylinders, Revenue, Net Profit, Dividend & Cash balance. I was worried Riverstone would not be as aggressive in raising ASP due to the business ethics and valuing of long term client relationship like Hartalega may cause results to come slightly below expectations. However, the fact shown, Q2 was an extremely strong set of results. This will serve as a strong indicator to other glove players.
I was holding my breathe with this coming announcement. Most know that I am not one to shout about or promote heavily on my stock picks. I would like to share with all my commentaries as part of my continuous responsibility of keeping my readers updated.
Q2 results is announced as 1H2020 as under SGX new ruling, companies need not to quarterly updates. However, the management has always remained with quarterly business updated. This time, the results announced is part of their regulatory requirement.
In summary, Riverstone's result is nothing short of spectacular. Despite the share price climbing all the way to $4.21 closing today (almost 5x), expectations were high going into the results. Yet, Riverstone delivered on all cylinders, Revenue, Net Profit, Dividend & Cash balance. I was worried Riverstone would not be as aggressive in raising ASP due to the business ethics and valuing of long term client relationship like Hartalega may cause results to come slightly below expectations. However, the fact shown, Q2 was an extremely strong set of results. This will serve as a strong indicator to other glove players.
1. Overview :
Revenue
grew 31% YoY from RM 480 Million to RM 626 Million. This led to high
net profit YoY for 6 months from RM 63 Million to RM 137.5 Million. So
how about QoQ? This is important as it helps you annualised the EPS per
Quarter. The net profit of Riverstone for this Q2 was RM91 Million
(RM137.5M-RM 46.6M Q1). This effectively meant Riverstone net profit
doubled from RM 46.6 Million to RM 91 Million for this Q2. Revenue also
increased 123% to RM 344 Million for this Q2 alone (RM623M - RM279M).
Management is also confident and generous where they increased the
dividend YoY 2.5X from 1.55 sens to 4 sens interim.
2. Cash Position / Strong Balance Sheet
Most
importantly, the cash balance / hoard of Riverstone jumped to a total
of RM 264 million. Last Q1, the cash position was RM170 million. The
Quarter before that, the cash position was RM135 million. On QoQ basis
alone, the cash increased by RM 94 million.
3. Capacity Expansion
During
my visit to Riverstone last year, Riverstone was already expanding
their new facility. It was nearing completion back then. With the
completion of Plant 6, it will add another 1.4 Billion capacity by Q4 to
10.4 Billion. This translates to 15% increase in new capacity
immediately in the 4Q this year (not next year) which will definitely
push revenue up by another 15% without factoring any ASP hike. This will
consequently flow to the bottlomline / net profit at higher magnitude
as we can see a Revenue increase of 23%, translate to a 100% increase in
net profit. The unexpected good news that some may overlook is the fact
the Chairman Mr. Wong Teek Son has spelled out a new phase of expansion through to 2023 -
Looking
further ahead, we are positioning ourselves to capture future growth
with the launch of our new three-year expansion plan at a new production
site in Taiping. The new Phases 7 to 9 is projected to grow our
capacity by up to 1.4 billion pieces per year to bring capacity to
14.0-15.0 billion pieces of gloves by FY2023.
This indicates there will be earnings growth and sustenance post pandemic / post FY2021.
4. Valuation of Riverstone
Now,
the EPS of Riverstone based on this single Quarter is 12.3 sens (SGD 4
sens). Annualised it to forward 4 quarters, the full year EPS is 49.2
sens ( SGD 16.13 sens). Without taking into consideration of capacity
expansion for Plant 6 which will add another 1.4 Billion capacity by Q4
to 10.4 Billion, I attached only a conservative estimate PER of 30x, the new Fair Value of Riverstone would be $4.83 (base case).
As most of my readers know, I update fair value or target price
conservatively as I rely on data and facts to make my valuation
assessment. I do not pluck numbers from the sky. Therefore, this is my
conservative valuation.
*Exchange rate used SGD to MYR of 3.05
Lastly,
please note Riverstone remains a laggard to Big 4 and other peers.
Hence, I have yet to sell a single Riverstone share until today. I
believe it will remain my multibagger stock.
http://www.tradeview.my/2020/05/tradeview-2020-long-term-value-pick-2.html
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Food for thought:
https://klse.i3investor.com/blogs/tradeview/2020-08-05-story-h1511555623-_Tradeview_2020_Riverstone_Holdings_Ltd_AP04_Q2_Results_Commentaries_No.jsp
