Excerpts from RHB report
| Initiate coverage with a BUY and DCF-derived SGD5.45 TP, 50% upside with c.3% FY20F yield.
The discount reflects its smaller market cap and lower liquidity.
Nitrile glove producer specialising in cleanroom and healthcare glove production. Riverstone is primarily a nitrile glove manufacturer, with a 95% focus on nitrile gloves.
The remaining 5% consists of latex gloves.
Its clients are mainly from the cleanroom and healthcare industries.
OBM business model for cleanroom; OEM for healthcare. Products from Riverstone’s cleanroom division are sold under the “RS Riverstone Resources” brand, for use in cleanroom environments.
As for the healthcare division, Riverstone is an OEM producer – similar to most glove producers in Malaysia. Revenue contribution from the cleanroom and healthcare divisions are at 31% and 69%.
FY20F earnings to surge 262% YoY, 105% in FY21F. Riverstone stands to benefit from the rising ASPs in healthcare and cleanroom gloves, given the acute global shortage of gloves.
Strong management team. The company’s founder and CEO, Wong Teek Son, has 31 years of experience in the gloves manufacturing industry.
The company has increased its ASP for healthcare gloves by 10% MoM since June, and expects the uptrend to continue for both healthcare and cleanroom gloves, up to end-2020.
42% capacity expansion over the next three years. The company plans to expand its capacity by 1.5bn pieces pa (ppa) in FY20F, FY21F and FY22F.
All in, we expect Riverstone to expand its production capacity by 42% to 13.5bn ppa by end-FY22.
Strong balance sheet with net cash of MYR264.1m – an improvement from its net cash of MYR117.4m as at end-Dec 2019. This was on the back of higher net cash flow from its operations in 1H20, which has tripled YoY.
| Undervalued. At its current share price of SGD3.64, Riverstone is trading at 8.6x FY21F P/E.
This is below its average forward P/E of 13.4x, which we think is unjustified.
Its long term earnings growth prospects are bright, given the positive outlook for the cleanroom and healthcare industries.
Risks to our valuation and earnings forecasts: Industry overexpansion, lower-than-expected USD/MYR, and volatile raw material prices.
TP of SGD5.45. We use Discounted Cash Flow-Free Cash Flow to Firm (DCF-FCFF) to value Riverstone.
Key parameters are a WACC of 8.3% and terminal growth rate of 1%.
Our TP of SGD5.45 implies 12.7x FY21F P/E.
Against peer average of 18x, the implied forward PE of 12.7x is at a 29% discount.
We believe that the discount is justified, given Riverstone’s smaller market cap and lower stock liquidity.
Full report here.