See important disclosures at the end of this report Powered by EFA TM Platform 1 Initiating Coverage, 4 November 2013 Riverstone Holdings (RSTON SP) Buy Technology - Technology Target Price: SGD1.05 Market Cap: USD222m Price: SGD0.75 Diamond In The Rough Macro Risks Growth Value 91 101 111 121 131 141 151 161 171 181 191 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 Riverstone Holdings (RSTON SP) Price Close Relative to Straits Times Index (RHS) 1 1 1 1 1 2 2 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Vol m Source: Bloomberg Avg Turnover (SGD/USD) 0.17m/0.13m Cons. Upside (%) 1.3 Upside (%) 40.9 52-wk Price low/high (SGD) 0.40 - 0.75 Free float (%) 32 Shareholders (%) Mr Wong Teek Son 50.8 Mr Lee Wai Keong 13.0 Shariah compliant Edison Chen +65 6232 3892 [email protected]Terence Wong CFA 65 6232 3896 [email protected]Source: Company data, OSK-DMG estimates A hidden gem, Riverstone is a nitrile glove maker set to be the next big thing. This river stone is ready to be polished into a true jewel as: i) booming demand and expanding capacity make for exciting growth, ii) a wide investment moat protecting its niche, and iii) solid financials and management. We initiate coverage with a BUY and SGD1.05 TP, based on a 16.3x industry average blended forward FY13/14 P/E. Booming demand, growing capacity make for exciting growth story. We believe that Riverstone’s on-going expansion will catapult the company into the big league. Demand for its cleanroom products look extremely robust, with the existing demand for premium nitrile gloves set to remain stable and its new product cracking open new markets. On the healthcare side, Riverstone’s European customers are increasingly asking the company to boost capacity to help them diversify their supplier base, which may potentially triple orders. If the company achieves its plan of expanding to an annual production capacity of 8.0bn pieces in FY19, we expect its earnings to grow at a CAGR of 22.4% starting from FY13, up more than 4.1x to MYR163.4m by then. A wide moat protects its niche. Riverstone’s: i) high brand equity, ii) dominant market share in the high-end nitrile cleanroom glove industry, iii) status as the sole supplier to hard disk drive (HDD) giants, and iv) years of R&D and business experience have led to a wide investment moat protecting the company’s business. Low valuation undeserved. Riverstone is trading at a 12.4x forward P/E, the cheapest vis-a-vis the 16.3x industry average, and 2.2x forward P/BV vs the industry’s 3.3x average. It also provides the highest yield. We believe that the company’s listing in Singapore rather than Malaysia – where glove stocks are better understood – is one reason why investors have missed its sparkle. Risks. These include: i) possible pricing pressure arising from expansion in healthcare glove capacity, ii) raw material price fluctuations, and iii) exposure to forex volatility. Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total turnover (MYRm) 222 273 310 371 409 Reported net profit (MYRm) 40.4 38.6 39.7 55.9 61.6 Recurring net profit (MYRm) 40.4 38.6 39.7 55.9 61.6 Recurring net profit growth (%) 0.0 (4.4) 2.7 40.9 10.2 Core EPS (MYR) 0.13 0.12 0.12 0.15 0.17 DPS (MYR) 0.06 0.06 0.06 0.06 0.06 Dividend Yield (%) 3.1 3.1 3.2 3.3 3.4 Core P/E (x) 14.7 15.6 15.6 12.4 11.4 Return on average equity (%) 21.7 18.2 16.6 19.6 18.4 P/B (x) 2.96 2.69 2.43 2.20 1.99 P/CF (x) 11.7 14.6 10.4 10.5 8.7 EV/EBITDA (x) 10.2 10.2 8.7 7.1 6.4 Net debt to equity (%) net cash net cash net cash net cash net cash Our vs consensus EPS (%) 0.0 0.0
Transcript
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A hidden gem, Riverstone is a nitrile glove maker set to be the next big thing. This river stone is ready to be polished into a true jewel as: i) booming demand and expanding capacity make for exciting growth, ii) a wide investment moat protecting its niche, and iii) solid financials and management. We initiate coverage with a BUY and SGD1.05 TP, based on a 16.3x industry average blended forward FY13/14 P/E.
Booming demand, growing capacity make for exciting growth story.
We believe that Riverstone’s on-going expansion will catapult the company into the big league. Demand for its cleanroom products look extremely robust, with the existing demand for premium nitrile gloves set to remain stable and its new product cracking open new markets. On the healthcare side, Riverstone’s European customers are increasingly asking the company to boost capacity to help them diversify their supplier base, which may potentially triple orders. If the company achieves its plan of expanding to an annual production capacity of 8.0bn pieces in FY19, we expect its earnings to grow at a CAGR of 22.4% starting from FY13, up more than 4.1x to MYR163.4m by then.
A wide moat protects its niche. Riverstone’s: i) high brand equity, ii)
dominant market share in the high-end nitrile cleanroom glove industry, iii) status as the sole supplier to hard disk drive (HDD) giants, and iv) years of R&D and business experience have led to a wide investment moat protecting the company’s business.
Low valuation undeserved. Riverstone is trading at a 12.4x forward
P/E, the cheapest vis-a-vis the 16.3x industry average, and 2.2x forward P/BV vs the industry’s 3.3x average. It also provides the highest yield. We believe that the company’s listing in Singapore rather than Malaysia – where glove stocks are better understood – is one reason why investors have missed its sparkle.
Risks. These include: i) possible pricing pressure arising from expansion
in healthcare glove capacity, ii) raw material price fluctuations, and iii) exposure to forex volatility.
Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F
Total turnover (MYRm) 222 273 310 371 409
Reported net profit (MYRm) 40.4 38.6 39.7 55.9 61.6
Recurring net profit (MYRm) 40.4 38.6 39.7 55.9 61.6
Recurring net profit growth (%) 0.0 (4.4) 2.7 40.9 10.2
Core EPS (MYR) 0.13 0.12 0.12 0.15 0.17
DPS (MYR) 0.06 0.06 0.06 0.06 0.06
Dividend Yield (%) 3.1 3.1 3.2 3.3 3.4
Core P/E (x) 14.7 15.6 15.6 12.4 11.4
Return on average equity (%) 21.7 18.2 16.6 19.6 18.4
P/B (x) 2.96 2.69 2.43 2.20 1.99
P/CF (x) 11.7 14.6 10.4 10.5 8.7
EV/EBITDA (x) 10.2 10.2 8.7 7.1 6.4
Net debt to equity (%) net cash net cash net cash net cash net cash
Our vs consensus EPS (%) 0.0 0.0
Riverstone Holdings (RSTON SP) 4 November 2013
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Table Of Contents Company Background................................................................................................. 3 Industry Analysis ......................................................................................................... 5
Cleanroom gloves ................................................................................................... 7 Medical gloves ......................................................................................................... 8
Company Analysis .................................................................................................... 10 Investment Merits ...................................................................................................... 15 Investment Risks ....................................................................................................... 17 Forecasts And Valuation ........................................................................................... 18
See important disclosures at the end of this report 3
Company Background A pioneer in cleanroom and nitrile gloves
Riverstone Holdings is a rubber glove manufacturer with a niche in the electronics cleanroom industry. Established in 1989, it started focusing on manufacturing cleanroom gloves in 1991.
By end-1994, the company became what was believed to be the first manufacturer of cleanroom gloves in Asia with a fully-integrated production process.
In the same year, Riverstone also successfully developed – as well as became – the pioneer manufacturer of nitrile (a type of synthetic rubber) gloves in Malaysia, chalking up a milestone of sorts and pipping current nitrile glove market leader, Hartalega.
In 2010, Riverstone expanded into the manufacturing of medical nitrile gloves for the healthcare segment. Its nitrile glove manufacturing knowhow allowed the company to deliver customised gloves, thus differentiating itself from the competition.
Its efforts have not gone unrecognised as it has won numerous awards and accolades, including being named Forbes’ Asia’s Best Under A Billion (please see
Appendix 4 for more).
Figure 1: Riverstone history
Source: Company, OSK-DMG
Figure 2: Revenue by region FY12 Figure 3: Revenue by product segment FY12
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17.8%34.0%
8.4%
10.8%
Europe China Southeast Asia
Other Parts of Asia Rest of the World
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40%
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Healthcare Cleanroom
Source: Company data Source: Company data
Riverstone Holdings (RSTON SP) 4 November 2013
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Figure 4: Riverstone’s positioning in the industry value chain
Source: Company, OSK-DMG
As a rubber glove manufacturing company, Riverstone processes raw materials like natural rubber and synthetic rubber into gloves before delivering it to consumers. Riverstone has two major types of end consumers, namely i) cleanroom users in the electronics industries such as HDD manufacturers, and ii) healthcare users like hospitals and clinics. For Riverstone’s cleanroom products, it sells to end customers under its respected RS Riverstone Resources brand. As for its healthcare products, the company is also an original contract manufacturer for established medical supplies vendors.
Riverstone Holdings (RSTON SP) 4 November 2013
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Industry Analysis Nitrile gloves seen as superior to latex ones. There are two main types of rubber gloves in the market currently: i) latex gloves – made from natural rubber, and ii) nitrile butadiene rubber gloves (commonly known as nitrile gloves). The latter is made
from a synthetic rubber produced from two materials – acrylonitrile and butadiene. Historically, latex gloves are seen as the cheaper alternative to the more superior nitrile gloves, as the latter possesses a host of features that the former does not.
Figure 5: Reasons why nitrile gloves are better than rubber ones Benefits
Superior resistance properties Nitrile gloves provide superior resistance properties in terms of chemical resistance, puncture resistance, etc.
Value for money From the US Environmental Protection Agency, “nitrile gloves... offer good value for your safety dollar.”
Latex allergy issues Latex allergy affects about 1% of the general population, but for the main users of gloves (healthcare workers),
it can increase up to 5-15%.
More stable raw material prices Compared to latex, a natural product which is influenced by multiple factors, nitrile enjoys more stable pricing
due to its synthetic man-made nature.
Latex technology constraints lead to increased cost Nitrile gloves can made as thin as 3g while fulfilling safety requirements set by authorities, whereas latex has
to be as much as 5g. This translates into significant cost savings for manufacturers.
Source: The Australasian Society of Clinical Immunology and Allergy(ASCIA), US EPA,OSK-DMG
High-end nitrile gloves are better for electronics cleanroom environments.
Given the sensitive nature of the electronics products, products used in electronics manufacturing cleanrooms often have to adhere to extremely strict levels of particle count and extractable contamination. Out of the various types of gloves, from PVC to latex, nitrile gloves offer the lowest levels of particle count and extractable contamination. Additionally, when compared with latex, nitrile offers superior abrasion resistance coupled with more favourable Electrostatic Discharge (ESD) properties.
Figure 6: Nitrile gloves are the better choice for electronics cleanroom production Material Vinyl/PVC Natural rubber latex Nitrile
Material Properties High non-volatile residues and wet particle
counts.
Poor flexibility and ergonomics.
Low strength and elongation.
Possibility of producing gloves with low ionic
and particle residue.
High tensile strength, with good elastic
properties.
Prone to shedding particles in use.
Possess superior ESD properties.
Gloves can be produced with extremely low
ionic and particle residues.
Good abrasion resistance.
Good to acceptable elongation and tear
resistance.
Cleanroom (CR) Low sensitivity to particle contamination Fulfils needs to avoid particulates and ionic
contaminants.
Compatible with gamma-irradiation for sterile
gloves.
Ideal for ESD sensitive applications
Provides highest cleanliness levels in terms of
low particle and ionic contaminants.
Suitable for gamma-irradiation in sterile gloves.
Low Best
Quality
Source: Cleanroom-Technology UK
Nitrile gloves demand growing rapidly. Looking at Malaysia’s export data from the
Malaysian Rubber Export Promotion Council (MREPC), nitrile gloves have been
Riverstone Holdings (RSTON SP) 4 November 2013
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experiencing rapid CAGR of 36.63% from 2009 to 2012. We note that the strong growth is based partly on organic growth, but also on cannibalising the existing latex glove market, as customers switch from latex to nitrile. Going forward, we expect this switching trend to continue.
Figure 7: Malaysia’s export of gloves
Source: Malaysian Rubber Export Promotion Council (MREPC)
Large potential for nitrile gloves exists. Due to historical and cost reasons, latex
gloves are still currently holding the lion’s share of the market in most regions. We see the EU nations being the most attractive market at the moment as they are on the middle of switching from latex to nitrile. If we were to assume that they would reach the same nitrile-latex ratio as the U.S., they would hold the largest potential for nitrile gloves in terms of the number of pieces. Also, the under penetration of nitrile in the rest of the world, particularly the developing nations (hitting as high as 95% latex), hold abundant future growth potential.
Companies are ramping up nitrile capacity. In view of this surge of demand, the
top four glove manufacturers in Malaysia, namely Top Glove (TOPG MK, NEUTRAL,
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Riverstone Holdings (RSTON SP) 4 November 2013
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TP: MYR6.34), Hartalega (HART MK, BUY, TP: MYR7.95), Kossan (KRI MK, BUY, TP: MYR7.53) and Supermax (SUCB MK, BUY, TP: MYR3.01), are increasing their glove production capacity too by 12-16% each year in order to reflect the surge in demand for nitrile gloves.
Cleanroom gloves grew fastest, nearly doubling in three years. In particular, we
see that cleanroom glove export value grew the fastest, growing to MYR210m from MYR117m – a 93% increase in total over three years, or a CAGR of 34%. Quantity grew a respectable 20.1% to 0.44bn from 0.25bn in the same period. We observe that value grew faster than quantity, indicating the rise in ASP of cleanroom gloves, given that HDD and electronics manufacturing firms are placing an increasing emphasis on their importance.
Figure 11: Cleanroom gloves grew the fastest Type
Value Quantity Value Quantity Value Quantity Value change Quantity change
(MYRm) (bn pcs) (MYRm) (bn pcs) (MYRm) (bn pcs)
Cleanroom 117 0.25 165 0.37 210 0.44 34.0% 33.2%
Household 512 0.42 609 0.40 564 0.39 5.0% -2.8%
Industrial 614 1.73 621 1.87 614 1.98 0.0% 6.8%
Food Grade 12 0.07 10 0.05 12 0.07 0.0% 0.0%
Medical 7289 34.54 7857 32.26 8280 37.52 6.6% 4.2%
2010 2011 2012 CAGR 2010-2012
Source: MREPC
Driven by cloud computing, HDD demand will remain stable. While the recent
slump in personal computer (PC) shipments have negatively impacted the HDD industry, Gartner still expects demand for HDDs to continue to grow, albeit a slower rate. The research house estimates that HDD unit shipments will register a CAGR of 2.4% in 2012-2017, largely driven by cloud computing. Gartner believes that the bright spot is expected to come from enterprise demand. It expects enterprise HDD rates to grow 2.5x in the next five years to 156m units in 2017 from 63m units in 2012, while solid state drive (SSD) rates quadruple to 20.16m units from 5.73m units in the same period.
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46 53.5 50.6 51.8 54.7 57 59.8
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Riverstone Holdings (RSTON SP) 4 November 2013
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Figure 12: Enterprise HDD demand
Source: Gartner
Other semiconductor electronics will continue to grow as well. Other than
HDDs, other forms of semiconductor electronics are forecasted to grow as well. For Riverstone’s new market, i.e. tablets and mobile devices, IDC expects both to grow by more than 70% in 2013-2017. On a more macro perspective, the semiconductor industry is also expected to grow positively at a CAGR of 3% in 2013-2015.
Figure 13: Robust growth expected for tablet and smartphone shipment Product Category 2013 unit shipments (m) 2013 market share 2017 unit shipments (m) 2017 market share 2013—2017 growth
Desktop PC 134.4 8.60% 123.11 5% -8.40%
Portable PC 180.9 11.60% 196.6 8% 8.70%
Tablet 227.3 14.60% 406.8 16.50% 78.90%
Smartphone 1,013.20 65.10% 1,733.90 70.50% 71.10%
Total 1,556 100% 2,460.50 100% 58.10%
Source: IDC
Medical gloves
Medical gloves demand will continue to rise as well. On the other hand, while not
as explosive as cleanroom gloves, healthcare gloves still present decent CAGR growth rates of 6.6% and 4.2% for quantity and value respectively. We believe that quantity growth will continue to be a key driver for demand, given factors such as barrier protection, increasing awareness, an aging population and others will drive demand going forward.
Figure 14: Demand for medical gloves growing Type
Value Quantity Value Quantity Value Quantity Value change Quantity change
High risk 219 0.62 216 0.42 103 0.28 -31.4% -33.2%
Medical gloves total 7289 34.541 7857 32.256 8280 37.524 6.6% 4.2%
2010 2011 2012 CAGR 2010-2012
Source: MREPC
Governments’ spending on healthcare has increased. Based on World Health
Organisation (WHO) data, we note that there has been a huge increment in healthcare spending by governments around the world. In fact, all regions have shown a doubling or near-doubling of their per capita healthcare spending. This indicates the growing awareness on the importance of healthcare.
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Figure 15: Per capita government expenditure on healthcare
Source: WHO, OSK-DMG estimates
Emerging nations to drive demand. With the rise of healthcare awareness and
expenditure, we believe that the emerging nations will drive demand for healthcare gloves, especially as the awareness for barrier protection increases. While developed nations such as the US and EU will continue to be the mainstay of glove demand, as their hygiene awareness is the highest, emerging nations have the potential to grow and play catch up – resulting in a narrowing of the current glove usage disparity. Pandemics to provide occasional demand boost. Pandemics like the severe
acute respiratory syndrome (SARS) in 2003-2006, influenza A (H1N1) in 2009-2010 and the most recent avian influenza A (H7N9) in 2013 onwards provide occasional demand boost to the healthcare gloves industry. While such outbreaks are unpredictable, we note the increasing trend of communicable diseases outbreaks, as globalisation increases disease transmission rates.
Riverstone Holdings (RSTON SP) 4 November 2013
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Company Analysis Focusing on high margin nitrile gloves. Riverstone focuses on manufacturing
premium nitrile gloves, with 88.1% of its revenue derived from nitrile gloves. This makes Riverstone closer to margin leader, Hartalega, whereby both focus on the more premium nitrile gloves vis-à-vis mass segment latex glove manufacturers like Top Glove, Kossan and Supermax.
Figure 16: FY12 revenue (by products)
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World leader in premium nitrile cleanroom gloves. Being one of the first movers
in nitrile gloves brought Riverstone many advantages. Today, Riverstone tells us that they are now the current global leader in the high end nitrile cleanroom market. Under the US FED STD 209E cleanroom standard, cleanrooms under class 10 and 100 have exacting standards and do not allow more than 10 and 100 particles (0.5 microns or larger) per cu ft of air respectively. Riverstone currently holds a ~60% market share, more than healthcare products giants such as Kimberly-Clark (KMB US, NR) and Ansell (ANSEL, NR). At the other end of the spectrum, players such as CE Solutions and Medi-Flex (MDFX SP, NR) occupy the mid-low end of the market.
Figure 17: Nitrile cleanroom market
Source: Company data, OSK-DMG estimates
Riverstone Holdings (RSTON SP) 4 November 2013
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Dominant supplier of cleanroom gloves to the HDD industry. Riverstone is the
sole supplier to HDD giants Seagate (STX US, NR) and Western Digital (WDC US, NR), and the dominant supplier to their upstream component suppliers. This serves as a testament of the quality of the company’s nitrile gloves, give the exacting cleanroom standards needed to protect sensitive electronics from contamination. Other customers like Hitachi (6501 JP, NR), Toshiba (6502 JP, NR) and TDK (6762 JP, NR) allow Riverstone to maintain a diversified customer base with each contributing less than 5% to revenue.
RS, an internationally renowned brand. Riverstone’s propriety cleanroom brand, RS, has become internationally renowned with products found in key high technology parks all over the world. The company’s pioneering venture into the cleanroom nitrile market has allowed it to earn high brand equity and loyalty amongst the premium users, often winning over larger, more-established competitors.
Switching costs are high for cleanroom gloves. The validation process for gloves
used for cleanrooms is typically a long and demanding one. A failure to maintain the cleanliness of the surrounding cleanroom environment can lead to product contamination and the subsequent costs of a batch failure. As such, given the critical nature of cleanroom gloves and it being a relatively small cost component, manufacturers are unlikely to swap from a trusted supplier to one of unknown quality. Therefore, we do not see any plausible challengers to Riverstone’s market leadership.
Higher ASPs equate higher barriers of entry into the cleanroom gloves business. As a whole, the industry’s ASPs of cleanroom gloves are 2.5x that of
medical gloves. This is because cleanroom gloves are manufactured under a more complex process, with two additional stages that includes a dangerous one that involves chlorination. Only through years of R&D has Riverstone been able to manufacture its cleanroom gloves in a manner that combines both cost efficiency and quality. As such, this ensures a high barrier to entry for any potential new entrants into this segment.
Figure 18: ASP of nitrile gloves Rubber gloves’ industry ASP 2011 2012 Change
See important disclosures at the end of this report 12
Figure 19: Riverstone’s cleanroom glove manufacturing process
Source: Company data
Continued investment in R&D delivers. Riverstone’s average annual investment of
4-5% of earnings into R&D and maintaining its 20-strong technical team has proved fruitful. Other than process refinement, quality standards and cost controls, the company’s R&D department has also developed new products for the market such as its most recent polymer coated gloves aimed at mobile, panel and tablet manufacturers.
Figure 20: R&D expenses
Source: Company data
New product victory. In FY12, Riverstone launched customised nitrile gloves
specifically aimed at mobile, panel and tablet manufacturers. Though priced lower, this glove product enjoys similar margins to its current cleanroom gloves as the company has managed to streamline the process to reduce cost. These polymer coated gloves are specially re-engineered to focus on ionic discharge properties. They have proven to be an unmitigated success, accounting for 20% of 4Q12 cleanroom revenue.
Riverstone Holdings (RSTON SP) 4 November 2013
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Customised medical gloves are a success. In 2009, Riverstone expanded into the
manufacturing of medical nitrile gloves. Their nitrile knowhow has allowed the company to deliver customisable gloves fulfilling the needs of the healthcare segment, allowing Riverstone to differentiate itself from the competition. This move has proven to be immensely successful, with annual healthcare revenue growing to more than MYR120m by the end FY2012 in a short period of four years.
Figure 21: Revenue (by segment)
Source: Company data
Backing from large European distributors. Riverstone’s ability to deliver
customised gloves has earned the business of several of Northern Europe’s largest distributors. Through a contract manufacturing model, the currently currently sells its medical gloves under the distributors’ brand. The demand for such products is good, given that these European giants have locked in multi-year, long-term contracts with a large number of hospitals and clinics.
Benefiting from customer supply chain diversification. Though considered a new
entrant into the medical gloves segment, Riverstone has rapidly established a foothold in the industry with a similar European customer base as that of industry leader Hartalega. While Hartalega remains the main supplier for these distributors (90% market share), Riverstone has become a second source of supply (10% market share). We note that these customers, in order to diversify their supply chain, have asked Riverstone to ramp up its capacity. Thus, going forward, we expect to see a 70:30 ratio, which will provide tremendous growth opportunities for the company.
Exciting capacity growth will arrive in 2H14. In view of the strong market potential,
Riverstone’s wholly-owned subsidiary, Sinetimed Consumables, has acquired a 30 acre plot of land close to its existing facilities in Taiping, Malaysia to fit its expansion plan. The company plans to more than double its existing capacity of 3.2bn pieces, adding 5bn pieces of capacity to hit 8.2bn by the end of 2018. With six phases of development, the first phase will be completed by 2H14 onwards.
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Riverstone Holdings (RSTON SP) 4 November 2013
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Figure 22: Production capacity expansion projection
Source: Company data, OSK-DMG estimates
Riverstone Holdings (RSTON SP) 4 November 2013
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Investment Merits Wide investment moat protects Riverstone’s niche. We feel that Riverstone’s: i)
high brand equity, ii) dominant market share in the high-end nitrile cleanroom glove industry, and iii) years of R&D and business experience has formed a wide moat around its business, making it difficult for competitors to wear down its market share and profit. Short of a global economic meltdown, we do not see any plausible threat to its profitability.
Exciting growth story ahead. We believe that Riverstone’s ongoing expansion plan
will catapult the group to a new high. Despite the industry expanding its nitrile glove production capacity, we remain upbeat about product demand for both the company’s cleanroom and healthcare gloves businesses. Demand for Riverstone’s cleanroom products looks extremely healthy, with existing demand for premium nitrile gloves set to remain stable while new product crack open new markets. On the healthcare side, Riverstone’s European customers are increasingly asking the company to ramp up capacity in order to help them diversify their supplier base. Hence, we are optimistic that any added capacity on its part will be easily absorbed.
Sound management leads to solid financial health. Riverstone’s management is
an experienced, diligent yet conservative one. Trained as a chemist, CEO Wong Teek Son grew the company to a listed company today from its humble beginnings as a sole proprietorship in 1989. He and his management team have successfully made Riverstone a cash generative business that rewards loyal shareholders with increasing dividends over the years.
Figure 23: Cash generative business with good dividends
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Closing the gap with Hartalega. With larger capacity comes: i) economies of scale,
and ii) the ability to absorb larger orders, which, in turn, effectively reduces plant downtime and improves production efficiency. Through its capacity expansion plan, Riverstone aims to not only improve topline, but also bottomline through economies of scale. Given time, we expect the company to close the margin gap with industry leader Hartalega.
Riverstone Holdings (RSTON SP) 4 November 2013
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Figure 24: Malaysian rubber glove manufacturers' net margins
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Source: Company data, OSK-DMG estimates
Top potential at bargain prices. Currently, the stock is trading at the cheapest
forward P/E, ie 12x, amongst its Malaysia-listed peers (industry average of 16.3x). Yet, it delivers the highest yield and the second-highest margin to Hartalega. In view of its ongoing capacity expansion and Riverstone’s niche positioning, we believe the company has what it takes to join the industry’s Big Four, thus creating a Big Five. Thus, it deserves to be re-rated. If Riverstone’s expansion plan are executed successfully (˃8bn production capacity in FY19), we expect its earnings to grow at a CAGR of 22.4% starting from FY13, jumping more than 4.1x to MYR163.4m by FY19.
Figure 25: Revenue and net profit projection
Source: OSK-DMG estimates
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Riverstone Holdings (RSTON SP) 4 November 2013
See important disclosures at the end of this report 17
Investment Risks Healthcare glove capacity expansion may exert pricing pressure. With a large
increase in the production capacity of major glove manufacturers, this could pose the risk of an industry oversupply and, therefore, falling margins. Our Malaysian rubber glove analyst expects annual demand growth for rubber gloves to remain at a steady at 10% over the next few years, mainly driven by nitrile-based gloves. As such, we see the demand for nitrile gloves to stay intact over the coming years. We opine that Riverstone’s strong branding entity, as well as differentiation in being able to deliver customised gloves, gives the company with a wider moat than most of its competitors. Furthermore, Riverstone enjoys the backing of strong distributors that hold long-term contracts with a large number of hospitals. Upstream price fluctuations may increase costs. Volatile raw material prices for
resources such as butadiene, which are needed for the manufacturing of nitrile gloves, could affect its bottomline. However, our Malaysia rubber glove analyst forecasts that raw material prices will remain favourable in the short-run. More importantly, even if prices do go against Riverstone, we note that the company has contractual terms in place to pass-through up to 70-80% of cost increases to its customers.
Figure 26: Cost of goods sold (breakdown)
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15%
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9%
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Raw materials Labour Fuel Utilities Chemicals Others
Source: OSK-DMG estimates
Exposed to forex volatility. Despite reporting in MYR, Riverstone obtains most of
its revenue in USD. This allows its topline to be partially hedged, as about 50-60% of its costs occur in USD as well. The remaining expenses are largely charged in MYR and, therefore, are subject to forex risks. In general, the strengthening of USD against the MYR will benefit the company’s financial performance and vice versa.
Figure 27: USD/MYR Currency Rates
Source: OSK-DMG estimates
Riverstone Holdings (RSTON SP) 4 November 2013
See important disclosures at the end of this report 18
Forecasts And Valuation
Capacity expansion in focus. Riverstone’s expansion plan will be critical to its
strategy moving forward. The entire plan is estimated to require a capex of MYR400m. Thanks to its solid financial health and robust cash flow generation, the bulk of this capex can be financed by internal cash resources and bank borrowings. We are confident that Riverstone’s enhanced capacity will unlock the company’s true potential as an industry-leading nitrile glove maker.
Utilisation rates to hit 90%. Historically, Riverstone has been recording annual
utilisation rates of at least 80%. In the first half of 2013, the company achieved an admirable 85% utilisation rate even when there was a steady increase in capacity. Given the robust demand for its products, management is bullish on Riverstone’s 2H13 outlook, indicating that utilisation will hit 90%. As such, we are optimistic that with: i) its expanding capacity, and ii) improved production efficiency, the company is ready to set new financial performance records from FY13 onwards.
Figure 28: Revenue forecasts (by segment)
Source: Company data, OSK-DMG estimates
Margins set to improve. Riverstone is currently ranked second in terms of margins
behind Hartalega, but ahead of Top Glove, Kossan and Supermax. We believe that the company will narrow the gap in the future as: i) its expansion plans play out and it achieves economies of scale, and ii) larger customer orders will lead to higher production efficiency. We see its margins improving to 15.1% in FY13 from 12.8% in FY12, assuming that ASPs of nitrile gloves remain stable.
Profitability set to grow. In the short term, market conditions are in Riverstone’s
favour. These are: i) favourable raw material prices, ii) a strengthening USD vis-à-vis MYR, iii) minimal impact of a hike in natural gas cost, and iv) demand for gloves remaining intact over the next few years. Going forward, we believe that the company’s: i) unique positioning in the premium nitrile glove segment, ii) enhanced production efficiency, and iii) better economies of scale, will, in combination, bolster its margins.
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See important disclosures at the end of this report 19
Figure 29: Net margins and profit forecasts
Source: Company data, OSK-DMG estimates
Strong cash flow and attractive dividends. Riverstone has been generating strong
operating cash flow and distributing 40-50% of its earnings as dividends over the past five years. Despite its ongoing expansion plan, the fact that the company remains in a net cash position (MYR91.2m) and has zero borrowings convinces us that it will have no problem in sustaining its dividend growth going forward. We expect Riverstone to distribute 6.2 sen per share and 6.5 sen per share for FY13 and FY14 respectively, translating into an attractive annual yield of 3.3% and 3.4%.
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Net profits (MYRm) Net margins
Riverstone Holdings (RSTON SP) 4 November 2013
See important disclosures at the end of this report 20
Peer P/E Valuation
Cheapest among Malaysian peers. Among the Malaysian glove manufacturers,
Riverstone trails behind the Big Four, namely Hartalega, Top Glove, Kossan and Supermax, in terms of size. However, its net margin is second only to Hartalega’s. If one adds to this that Riverstone was the pioneer in nitrile glove manufacturing as well as its global market dominance in high-end cleanroom products, the company certainly has the potential to be part of a future Big Five. However, the stock is only trading at a 12.4x forward P/E compared with the 16.3x industry average and 2.2x forward P/B vs the industry’s 3.3x average. Yet, Riverstone provides the highest yield.
Figure 30: Riverstone's peers comparison
Source: Bloomberg, OSK-DMG estimates
Initiating coverage with BUY recommendation and TP of SGD1.05. In view of
Riverstone’s: i) niche in the premium cleanroom gloves segment, ii) exciting growth opportunities, iii) robust financial health, and iv) sound management team, we believe that the stock should at least trade at the average P/Es of its Malaysian peers. The fact that the stock is listed in Singapore rather than Malaysia should not put it at a disadvantage in reaching its true potential.
All said, we initiate coverage on this undiscovered gem with a BUY recommendation. Our TP of SGD1.05 is derived from on a 16.3x (industry average) blended forward FY13/14 P/E.
Name Ticker Fiscal year-end Net gearing Cur-yr net margin Cur-yr ROE Cur-yr P/E Nex-yr P/E Cur-yr P/BV Cur-yr yield
Hartalega HART MK Mar Net Cash 0.22 30.2 20.8 19.1 5.9 2.2
Top Glove TOPG MK Aug Net Cash 0.09 16.2 15.8 14.5 2.5 3.2
Kossan KRI MK Dec 16.1 0.10 21.4 16.3 13.5 3.1 2.0
Return on average assets (%) 18.5 15.2 13.6 15.9 14.4
Return on average equity (%) 21.7 18.2 16.6 19.6 18.4
Net debt to equity (%) (21.9) (18.6) (25.1) (27.0) (17.9)
DPS 0.06 0.06 0.06 0.06 0.06
Recurrent cash flow per share 0.16 0.13 0.18 0.18 0.22
Source: Company data, OSK-DMG estimates
Riverstone Holdings (RSTON SP) 4 November 2013
See important disclosures at the end of this report 23
SWOT Analysis
Niche business provides a wide moat
Sound management ensures solid financial health
Enlarging capacity provides growth opportunities and economies of scale
Upstream price fluctuations may lead to higher costs
Exposure to forex volatility
Demand for cleanroom gloves to stay healthy due to company’s niche in the premium market
Demand for healthcare gloves to grow exponentially, driven by European customers diversifying their supplier base
Expansion in healthcare gloves capacity may exert pricing pressure
-10%
-6%
-1%
3%
8%
12%
17%
21%
26%
30%
0.0
2.0
4.0
6.0
8.0
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14.0
16.0
18.0
Jan
-10
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-11
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-12
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-13
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-14
P/E (x) vs EPS growth
P/E (x) (lhs) EPS growth (rhs)
0.0%
3.6%
7.1%
10.7%
14.3%
17.9%
21.4%
25.0%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
P/BV (x) vs ROAE
P/B (x) (lhs) Return on average equity (rhs)
Source: Company data, OSK-DMG estimates Source: Company data, OSK-DMG estimates
Company Profile Riverstone Holdings specilises in producing, selling nitril gloves used for clean-room manufacturing and healthcare industry.
Riverstone Holdings (RSTON SP) 4 November 2013
See important disclosures at the end of this report 24
Recommendation Chart
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
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0.80
Nov-08 Feb-10 May-11 Aug-12
Price Close
Source: OSK-DMG estimates, Bloomberg
Date Recommendation Target Price Price
2013-11-04
Source: OSK-DMG estimates, Bloomberg
Riverstone Holdings (RSTON SP) 4 November 2013
See important disclosures at the end of this report 25
Appendix 1
Board of Directors and Management Team
Riverstone Holdings (RSTON SP) 4 November 2013
See important disclosures at the end of this report 26
Appendix 2
Riverstone Group Structure
Riverstone Holdings (RSTON SP) 4 November 2013
See important disclosures at the end of this report 27
Appendix 3:
Riverstone Milestones
Riverstone Holdings (RSTON SP) 4 November 2013
See important disclosures at the end of this report 28
Appendix 4:
Riverstone Manufacturing Facilities
Riverstone Holdings (RSTON SP) 4 November 2013
See important disclosures at the end of this report 29
Appendix 4:
Riverstone Awards and Recognitions
30
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