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Dear fellow readers, 

 

 

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

 

1. Humble Beginnings

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

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%. Whilst it is true 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%

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.

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 every 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 PPE and 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

            


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 the "4 Kings".  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, 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.    

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