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Monday, 11 May 2020

(Tradeview 2020) Long Term Value Pick 2 - Riverstone Holdings Ltd (AP04) Greatness Lies in Humble Roots

Medical Nitrile Examination Gloves Manufacturer,Cleanroom Bags ...

Dear fellow readers, 

This is my Long Term Value Pick for 2020. 

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :

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Riverstone posts 24% rise in 1Q earnings to S$10.8 mil on higher ...

Long Term Value Pick 2020 : Riverstone Holdings Ltd. (Fair Value SGD $ 2.00) 

We primarily invest our funds in KLSE stocks. However, over the years, we have been investing across markets globally and have found some good investments in foreign markets. The reason for this is because the KLSE have been downtrending over the years and lack of catalyst and foreign participation. Whilst most of our investment are still primarily in Malaysia, it is good to have investments abroad to provide some hedge from domestic risk as well.  

Today, I would like to talk about Riverstone Holdings Ltd. I am sure everyone has heard about the "4 Kings" of the glove sector in Malaysia, namely Hartalega, Topglove, Kossan and Supermax. The smaller or niche players in the sector includes Comfort, Rubberex, Careplus and Adventa (has sold Aspion to Topglove). These are the listed names. There are also others which are not listed with some market presence such as YTY and WRP. So how about Riverstone? Well, this  company must be one of the most low profile, high quality and huge potential that we had the opportunity of discovering. Occasionally, there are hidden gems waiting to be discovered by those who look further. Riverstone is one of them and it is listed across the causeway - SGX. 

1. Humble Beginnings

Riverstone Holdings Ltd was listed in SGX in 2006 at the price of SGD $0.13. Today it reached a high of $1.48 over the course 15 years. This is a capital gain of 11.38x (excluding dividend gains). This is nothing short of an amazing growth and more importantly, this Malaysian owned glove company with a market capital of SGD $1.07 Billion (RM 3.3 Billion) is not even listed in Malaysia. 

Today, when people talk about the glove sector, Malaysians are very proud because Malaysia controls almost 65% of the world market share. However, what people do not see are the hardship and challenges that the glove makers overcome to become world leaders today. Riverstone is a story of grit, perseverance and innovation. Mr Wong Teek Son, the Chairman and founder of the company comes from humble beginnings. His family were farmers and he worked his way through school and graduated from University Malaya with a Bachelor of Science. 

Mr Wong did not immediately start his own business right out of school. In fact, it was never part of his plan. The company was founded in the midst of an economic crisis when the company he worked for closed down and he was able to use their production lines. At the time, competition in the industry, was intense. There were at least 300 glove factories in Malaysia and many could not survive resulting in closure. Together with partner Lee Wai Keong, he formed Riverstone Resources to focus on the manufacture of cleanroom natural rubber and nitrile gloves using advanced production techniques.

2. Growth, Innovation and Expansion

Since 1994, Riverstone Resources has pioneered the manufacture of gloves using nitrile latex in Malaysia, introduced online glove chlorination technology and developed nitrile finger cots using its own proprietary production technique. The company is a market leader in cleanroom gloves and over the years have ventured into medical gloves as well. To insulate revenues, Riverstone diversified into healthcare gloves. Although cleanroom gloves command better margins, demand for healthcare gloves is more resilient. Pharmacies, hospitals and clinics continue to use gloves even in a downturn, said Mr Wong in an interview with Singapore The Straits Times in 2016. True to his vision, with Covid-19 pandemic sweeping across the world, Riverstone has been playing a key role in the world supply of medical gloves. 95% of all products manufactured by the company is for the export market. The major clients of Riverstone includes Western Digital, Intel, Seagate, Cardinal Health amongst others. 

In addition, the company grew from just a manufacturing facility in Rawang, it has now total of 5 facilities located in Taiping, Thailand, and Wu Xi, China. From 2016 where the annual production capacity was 6.2 billion gloves per annum, with the latest completion of the healthcare glove facilty in Taiping (Eco Medi Glove), the company has reached an annual capacity of 10 billion gloves. Their products are also wide ranging. Apart from the staple products like Clean Room gloves, Sterilize gloves and Medical gloves, there are also consumables such as Cleanroom Fingercots, Packaging Bags, Face Masks, Cleanroom Wipers (Oem) and other Disposable Products. 

We had the opportunity to visit the Taiping facility. What impressed us most is the state of the art automation, efficiency and cleanliness of the the manufacturing facility. In addition, the company is extremely serious in ensuring the welfare of the employees / workers are taken care of. The workers’ hostel is also well built. From our understanding, the company complies with Europe's high standard on workers rights protection down to even a plug placement location is taken into consideration.   

3. Outstanding Financials and Balance Sheet (Updated with Q1 2020 Results)

Besides a good growth story, what we like most compared to other glove makers is the strong financial numbers and balance sheet of Riverstone Holdings Ltd. In short, some companies which are growing and doing well, they take on debts to fund their growth. For Riverstone, the company utilises internal funds and reinvest profits hence has minimal borrowings despite the ongoing expansion over the past few years. It is a high growth net cash company. This is what is most valuable to us as it allows us to have peaceful sleep at night without worrying about high gearing ratio. Have a look at the numbers below :

Riverstone has cash and equivalent of RM 130 million and borrowings of RM 13 million, which means it is net cash of RM117 million. Debt to equity is only 0.016. In addition, the cashflow from operations is close to RM160 million. If you look at the topline growth, it is growing at CAGR of 15.3%. It is true that the net profit and dividend growth is minimal over the past few years, this has to do with the company expanding capacity using internal funds instead of leveraging up on debts. Furthermore, if you compare to other of Malaysia's "4 Kings" glove makers, Riverstone has one of the best average profit margin of 13.5% along the likes of Hartalega compared to Topglove around 9.3%, Kossan 9.6% and Supermax 8.2%.   

If you look at the ROE, it is 16.52%, and the current ratio is impressive at 3.1x.  Riverstone also consistently declared dividend at least for the past 10 years which shows the companies' willingness to share profit with shareholders despite having to reinvest profits for expansion. Even so, the company was able to maintain a dividend yield of at least 2+%, As I have shared before, one of the most important factors to consider when investing is to study the dividend growth model as that is the way to assess whether the company is sharing profits with the shareholders. 

At today’s price of SGD$1.45, it is the highest level since IPO and it broke out from the previous of SGD $ 1.28. Please note that when we first shared the stock with our readers in previous articles, Riverstone was only trading at 20x PER around SGD 87 sens. If we summarise the financial numbers, it can be read as below based on trailing quarters :

PER = 25x 

Dividend Yield = 1.91%
NTA = SGD 35 sens
Beta = 0.64
Net Cash = RM 117 million
ROE = 16.52%
Earnings Growth = 6.6%

However, after releasing the article today, only then I found out Riverstone released their Q1 2020 voluntary results announcement. 

The results above speaks for itself. Revenue grew YoY by 16% to RM 279 million, net profit by 54% amounting to RM47 million. If converted to EPS, it is around SGD $ 0.20. Assuming we annualised this by 4 Quarters, it is $0.80 for full year. At current price of $1.45, it is only trading at 18x. At 25x PER, Riverstone fair value should be worth SGD $2.00.

4. Future & Continuous Growth Potential  

From the shareholding above, the top 20 largest shareholders controls up to 94% of the shares. Whilst it fulfill the public float requirement with about 33%, it is still rather low liquidity. 

However, this stock is clearly a beneficiary of Covid-19 pandemic and the ever changing landscape of healthcare, hygiene and sanitisation. We believe that Riverstone will only continue to grow and potential is limitless with new markets and demand globally. Even if the demand may normalise once a vaccine is found, the behavioural change is set in motion just as how SARS pandemic brought about different approach when it comes to utilising PPE and attitude of healthcare professionals in handling patients.

Furthermore, the company is a market leader in Cleanroom glove segment for semiconductors, technology and relevant ancillary sectors. In the event a vaccine is found and demand for medical gloves reduces, the demand pick up from the semiconductor and technology sector will still lead the way and further benefit the company's growth

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This is a very unique company. It is a Malaysia company with MNC global clients. It is not known as among the "4 Kings" of glove makers in Malaysia although it was founded in Malaysia and it should rightfully be in that category.  If not for it being listed in SGX, more Malaysian investors would know about the company and hence more Malaysian institutional funds would invest in the company. Riverstone in terms of production capacity is not as big as Hartalega, Topglove, Kossan or Supermax, but the net profit is actually higher than Supermax. In addition, Supermax has a market cap of RM 4 billion at 38x PER multiples, if we were to apply the same valuation to Riverstone, it would easily exceed Supermax to hit almost RM 5 billion in market cap.    

5. Value Growth Investment 

Therefore, although Riverstone has broken out and hit a historic high in view of upcoming QR and ex-dividend date, our long term fair valuation for is SGD $2.00 based on the back of EPS of SGD $ 8 sens at 25x future PER for FY21/22. This is excluding the positive of their cash holdings, consistent dividend, new expansion of manufacturing facility with 92% utilization rate and positive increase of 20% in demand due to Covid-19. This is our prudent estimation for a net cash high expansionary company. For those who are worried the price is too high, you can always put in your watchlist and collect on weakness. We called a buy on this stock last year end 2019 and added more during the recent selldown in March 2020.

The difference from other companies, the founder is still involved in day to day operations. On top of that, he is part of the R&D team due to his knowledge in chemistry. Being hands on allowed the company to do well as all nitty gritty of the daily operations are taken into account when formulating business strategies. We like the company just as much as we like the founder who is humble, honest, hardworking and knowledgeable. For those who likes such a company and would want some overseas investment exposure, one can consider Riverstone Holdings Ltd. as your long term value pick. We are personally invested and we believe this company will keep growing. This is a stock which I want to and am happy to own a small part of the business for a long time to come. 


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