My Bull Case For Riverstone Holdings (AP4)

Riverstone was my first value-growth stock and has been a large part of my portfolio since then.  I clearly remember making my first purchase at $0.81 on 31st March 2014, using my phone app, while accompanying a group of children for an excursion at Gardens By the Bay as part of a Community Involvement Program (CIP).  Back then, it was near the all-time high of $0.84, I was hesitant to take the leap of faith at first due to the fear of it retracing, but thank goodness I did it anyways.  Fast forwards to today, Riverstone has appreciated 182.7% excluding dividends in the span of roughly 1.7 years.  What seemed like an all time high then looks minuscule now doesn’t it?  Below are the following reasons why I am still vested in this company and think that there’sstill room for growth

The Business

Riverstone is in the business of manufacturing cleanroom gloves for the electronic industry and medical gloves for the healthcare industry.  This is a relatively simple and understandable business.  Riverstone obtains raw material to manufacture the gloves and sells them to its customers.  Riverstone is currently well-positioned to benefit from the change in trend of preference for nitrile gloves (which Riverstone manufactures) compared to latex gloves (which causes allergic reactions).  The business economics of gloves is excellent as it is consumable, recurring in nature, and takes up a small percentage of COGS.  For example, after a doctor examines a patient, he has to throw way that pair of gloves and don on a new pair before examining the next patient.  This process repeats itself until the gloves run out and the doctor has to obtain more gloves, which takes up only a small fraction of operating costs of running a clinic/hospital, so it is unlikely that the doctor will think twice about the cost of gloves.  This makes customers of Riverstone sticky and loyal.  In the cleanroom industry, Riverstone has a 60% market share.  Though the same cannot be said for the healthcare industry, Riverstone has been getting overwhelming demands from potential customers that are seeking to diversify their supplier base.  Furthermore, with the rapid urbanisation of the emerging markets and China, demand for medical gloves is bound to grow. 

In April 2013, as part a response to the overwhelming increase in demand for gloves, Riverstone acquired a 30-acre plot of land in Taiping, Perak, Malaysia.  The plan was to build a new production facility, constructed over 6 phases, adding 1 billion gloves in production capacity per phase.  Each phase was to take approximately 1 year to complete.  Hence, given the clear expansion plans all the way to 2019, Riverstone still has much room to boost its top line while enjoying economies of scale which will further improve its bottom line and margins.  In addition, the long-term strengthening of the USD and weakening of the MYR will further boost earnings as a large part of Riverstone’s revenues are in USD while a large part of its expenses are in MYR. 

Year

Phase

Year-End Production Capacity (in billions)

Capacity Growth (%)

2013

–

3.2

–

2014

1

4.2

31%

2015

2

5.2

24%

2016

3

6.2

19%

2017

4

7.2

16%

2018

5

8.2

14%

2019

6

9.2

12%

The Management

Riverstone is currently led by its Founder, Executive Chairman, and Chief Executive Officer Wong Teek Son.  He owns 47.51% of Riverstone.  Chief Operating Officer and Executive Director Lee Wai Keong owns 11.66%.  Group Business Development Manager and Executive Director Wong Teck Chong, brother of Wong Teek Son, owns 3.98%.  In aggregate the key management owns a total of 63.09% of Riverstone.  Allow me to side track for a moment.  Although not statistically proven, based on my experience, companies who are led by their founders with significant stakes tend to do much better than professionally managed companies.  Think Apple, Amazon, Walmart, Microsoft, Facebook, Starbucks, and Alibaba.  Founders are passionate, self motivated, and driven.  They treat their company like their children and would not sacrifice long-term gains for short-term prosperity.  The same cannot be said for professionally managed companies where executives are paid monthly or yearly wages.  The best example, is the recent emissions scandal, of Volkswagen.  The CEO knew what was going but kept quiet about it.  When found out, he quickly resigned and is likely to obtain a $32 million pension after leaving!  In the end, its the shareholders who would foot that bill plus the billions in fines Volkswagen would have to pay as a result of this scandal. 

Riverstone’s management has also proved to be efficient allocators of capital.  They funded the entire Phase 1 and 2 internally without incurring debt and issuing shares.  With excess cash they have also redistributed it back to shareholders in the form of increasing dividends (see chart below).  Not to mention that Riverstone is completely debt free.  A company without debt cannot go bankrupt.  Riverstone’s management’s execution of its growth plans thus far has been excellent, which plans not only going according to plan but accelerating due to the high demand and enquires from existing and potential customers. 

The Financials

Riverstone’s financials are solid, which validates the strength and sustainability of its business and the management’s competence in allocating capital, managing costs, while pursuing growth.  Since 2005, Riverstone’s revenues and profits has been steadily increasing.  Due to the non-cyclical and resilient nature of the glove business, Riverstone actually made more during the financial crisis of 2008-2009.  Riverstone also has superior margins vs. its competitors due to its niche in cleanroom gloves which command better margins.  This has enabled it to produce high quality ROEs in excess of 16% from 2005-2015 with little to no debt.  Riverstone is also a cash generative business with steadily increasing cashflow from operations.  This enables Riverstone to fund its growth internally and pay increasing dividends.  Free cashflow has been positive over the years but turned negative last year due to the CAPEX used to fund the company’s growth, which is acceptable. 

The Valuation

I first got Riverstone at a valuation of roughly 13x P/E. Now, it is valued at 21x P/E. Which means that the share price has out paced the growth in the company’s earnings.  Some people may be concerned that Riverstone’s best days are over and is due for a correction, but I believe otherwise.  In my opinion, Riverstone still has much room to grow and such above average rates of growth should garner higher, if not, current valuations.  Riverstone is currently valued below the peer average despite having superior growth rates and ROEs compared to its peers.  Furthermore, the glove industry should be able to sustain such valuations in the 20s due to its non-cyclical, resilient, and medical industry-related nature. In fact, it is not uncommon for medical companies to have lofty valuations.  Raffles Medical Group is currently valued at 36x P/E. Singapore O&G = 38x P/E. Q&M Dental = 43.21x P/E. I believe Riverstone should be valued at 25x P/E (peer average) at the very least given the reasons mentioned above.  Assuming the growth plans materialises all the way to 2019, increases in production capacity is met with proportionate demand, ASP remains constant, Riverstone could potentially be worth $4.30 by 2018-2019. 

Positive catalyst include the recently proposed 1-1 bonus issue.  If passed, Riverstone’s trading liquidity will improve and that would allow greater participation by investors (retail or institutional).  This could give Riverstone’s valuation, and thus, its share price a further boost. 

Kenny Chia

8 thoughts on “My Bull Case For Riverstone Holdings (AP4)”

Great write-up on Riverstone!  Impressed with your capital growth as well.  Moving forward (now with the issuance of 1 for 1 bonus shares and a great drop in share price), do you see further upside to the growth story of Riverstone? 

Many catalyst such as the weaking ringgit has seem to be priced into its share price.  Having said that, is it still a value buy at approx P/E of 20? 

I definitely do see further upside to Riverstone’s story.  We are only 60%-70% there in the company’s declared expansion plans.  Though I am not banking on it, a positive wild card would be if management announces further capacity expansion plans after 2018.  Riverstone’s production capacity is still much smaller compared to the Big 4. 

In terms of absolute valuation, it is indeed pretty high.  However, given the growth prospects and defensive nature of the business, I believe the valuation is justifiable.  In terms of relative valuation, Riverstone’s valuation is actually lower than that of other large glove companies and healthcare stocks. 

If you’re confident that Riverstone’s valuation can hold or rerate higher, it may be worth accumulating some at current prices. 

Thank you for the good write up in SWOT, Bull Case and recent My Insight in Riverstone. 

If you can clarify further, i have some queries. 

1.  How do you get the SGD 1.86 valuation, what is the assumed growth rate and NPM? 
2.  Although the capacity of Butadiene expect to increase with Syntomer 2 phases of 100Kwt each, what is this relative to overall global capacity? 
3.  Frankly when i see the report in RM, USD for raw material and ASP, finally share priced in SGD.  i am a bit lost on currency fluctuation impact.  How does increase in USD/RM impact the share price in SGD? 

1.  I came up with a $1.86 valuation through some forecasting, by taking into account of P/E growth rate over the past 5 years and continued to project forward.  I then also used P/S and did the same projection and was able to achieve the $1.86 figure as well.  To further confirm if my numbers made sense, I looked into the revenue per billion gloves and the numbers appeared reasonable to me as confirmed by the past 7 years.  In terms of NPM, I used 18% for 2019, barring unforeseen circumstances. 

2.  Global capacity wise, I’m afraid I do not have the answer for it.  Primarily, the information on Synthomer gave me reassurance that firstly there must have been demand for them to ramp up just like what Riverstone is doing, and secondly, the news generally bodes well for companies who use Butadiene as raw material. 

3.  As Riverstone sells its gloves in USD, the foreign currency translation back to RM would bode well for Riverstone from the strengthening of USD.  For example, with the current exchange rate of USD/RM at 4.30, every $1 revenue made in USD would be reflected as RM4.30.  Now that it strengthens to say 4.80, every $1 revenue made becomes RM4.80, thus increasing revenue and then trickling down to the bottom line.  Also, a good point to note is that most of its expenses, if not all would be in RM so expenses are in RM(A weaker currency) while revenue in USD(A stronger currency).  Coming down to RM and SGD, for myself, I account for the difference in my P/E multiple used in my valuation.  For example, you would commonly hear Riverstone being valued at 18x P/E, but for my own study of it, I account for it as something like 6x.