• We expect Riverstone's FY20F earnings to surge 262% y-o-y, followed by another 105% in FY21F, supported by rising ASPs and a 42% capacity expansion between FY19 and FY22F.
• Initiate coverage on Riverstone with a BUY. Our Target Price, which offers 50% upside with 3% FY20F yield, implies 12.7x FY21F P/E, which is close to its 13.4x average P/E and at a 29% discount to the sector average. The discount reflects its smaller market cap and lower liquidity.

Riverstone - Company Background

Over 20 years of experience in the industry.

• Riverstone was founded in Malaysia in 1989, and was incorporated as a private company in Singapore on 3 Aug 2005. On 27 Oct 2006, Riverstone (SGX:AP4) was listed on the Singapore Exchange.
• Riverstone established track record in manufacturing high quality cleanroom gloves has earned the company various international manufacturing certifications, such as the ISO 9001:2015, as well as awards such as the 2003 Selangor Product Excellence Award.

Gloves manufacturer with 95% concentration on nitrile gloves.

• Riverstone is involved in manufacturing and distributing gloves. The company is mainly a nitrile gloves producer, with nitrile gloves making up 95% of the total gloves produced. The remaining 5% is latex gloves.

Two key divisions: cleanroom and healthcare.

• We gather that the gloves produced by Riverstone are categorised into two key divisions due to different customer requirements and ASP. Besides cleanroom and healthcare gloves, other products include finger cots, cleanroom packaging materials and facemasks.

OBM business model for its cleanroom gloves division.

• Riverstone's cleanroom gloves division are sold under the “RS Riverstone Resources” brand for use in Class 100 and the higher specification of Class 10 cleanroom environments. Customers for cleanroom gloves are industries involved in the manufacturing process, such as semiconductor manufacturing, pharmaceuticals, biotechnology, medical devices and life sciences.
• 95% of these products are sold to the electronics industry, with the remaining 5% sold to the pharmaceuticals industry. In these industries, a reduction of contamination is vital, hence, the need for cleanroom gloves with minimum particles. Although sales volume of cleanroom gloves makes up around 15% of total volume, its revenue contribution is higher at 26% due to its higher ASP as compared to healthcare gloves.

OEM business model for healthcare gloves division.

• For healthcare division, Riverstone produces gloves under the OEM business model. Its products include RS safe blue nitrile exam gloves, RS safe white nitrile exam gloves, RS safe black nitrile exam gloves, RS safe accelerator free nitrile exam gloves, and RS safe blue nitrile exam gloves.
• 90% of these products are sold to the healthcare industry, with the remaining 10% to the food industry. At group level, sales volume of healthcare gloves makes up around 85% of total volume. In FY19, the segment’s revenue contribution was 69%.

Expansion plans are underway.

• In 2020, Riverstone launched a new 3-year expansion plan located at a new production site in Taiping, Perak (acquired in 2019). This new plan is projected to increase capacity by up to 1.5bn ppa. We expect Riverstone’s capacity to reach 10.5bn ppa by end-2020 and 12bn ppa by end-2021.

Strong management team.

• Wong Teek Son, founder, executive chairman & chief executive officer - Wong was appointed to the Board as executive chairman on 3 Aug 2005. His responsibilities include developing business strategies and overseeing the company's operations. He holds a Masters in Business Administration from Monash University, and a Bachelor of Science (Hons) from University Malaya.
• Lee Wai Keong, co-founder & chief operating officer - He was appointed to the Board as an executive director on 3 Aug 2005. His expertise has helped the company meet the high quality control and production standards required in the highly demanding cleanroom industry. Lee is responsible for the company's production facilities in Malaysia, Thailand and China.
• Low Weng Keong, lead independent non-executive director - He was appointed to the board in 2006. He is a Life Member of CPA Australia and a Fellow Chartered Accountant in the UK and Singapore. Previously, he was country managing partner of Ernst & Young Singapore and former global chairman and president of CPA Australia.
• Albert Ho Shing Tung, independent non-executive director - He was appointed to the Board in 2006. Ho has 25 years of experience in the areas of corporate strategy, finance and investment banking. He holds a Bachelor of Commerce degree from the Australian National University and is a Fellow Certified Practising Accountant with CPA Australia.
• Raymond Fam Chye Soon, independent non-executive director - Raymond Fam currently sits on the Board of AmBank as an independent non-executive director. Personally, he is engaged in event management, digital media advertising and property development.

Riverstone's major shareholders.

• Wong Teek Son is Riverstone’s largest shareholder, with a total of 50.75% stake in the group, followed by Lee Wai Keong, who holds 10.92% interest. The Top 20 largest shareholders of the Riverstone are made up of mainly Singaporean investors.

Riverstone - Investment Thesis

Beneficiary of COVID-19, due to a spike in gloves demand.

• Riverstone stands to benefit from COVID-19, due to the surge in global demand for healthcare gloves. Due to exceptionally high demand, the company’s operations facility is running at an almost full utilisation rate of 95%, compared to its normal levels of 80-90% prior to the pandemic.
• Note that global demand for gloves has spiked due to the need to protect healthcare workers, and, to a certain extent, non-healthcare workers as well. This should benefit its healthcare segment, which contributes 85% of its sales volume, and 69% of revenue. The spill-over effect has also benefited its cleanroom gloves segment.

42% capacity expansion in the next three years.

• Riverstone plans to expand its capacity by 1.5bn ppa in FY20F, FY21F and FY22F. All in, we expect the company to expand its production capacity by 42% to 13.5bn ppa by end-FY22F.
• Demand for nitrile gloves in both the healthcare and cleanroom divisions is strong. Hence, we foresee a high chance of these capacities being taken up by customers once it is ready. As it is, all the capacity for its FY21 expansion has already been taken up.

Strong balance sheet.

• As at end-June, Riverstone had MYR274.1m cash and total debts of MYR10m. Its balance sheet remains strong, as it is in a net cash position of MYR264.1m. This is an improvement from its net cash of MYR117.4m as at end-Dec 2019.
• The increase in cash is on the back of significantly higher 1H20 net cash flow from its operations, at MYR222.2m, which had more than tripled from 1H19’s MYR73m.

Undervalued.

• At its current Riverstone share price of SGD3.64, Riverstone is trading at 8.6x FY21F P/E. This is lower than its average forward P/E of 13.4x, which we think is unjustified. Note that its long term earnings growth prospects are bright, due to the positive outlook for the cleanroom and healthcare industries.

Dividends expected to rise 288% y-o-y in FY20F.

• Riverstone declared a dividend of 7.4 sen in FY19 – an improvement of 9% y-o-y.
• Looking ahead, we expect dividends to increase 288% y-o-y to 29 sen, in line with a higher net profit. We assume a dividend payout ratio of 45%, which is close to FY19’s 42%. Although Riverstone does not have a dividend policy, its payout has been between 38% and 42% in the past five years.

Experienced management team.

• Both co-founders of Riverstone are still with the company. Wong Teek Son has 31 years of experience in the glove manufacturing industry, and is mainly in charge of developing business strategies. Lee Wai Keong is responsible for Riverstone's production facilities, and has helped meet the high quality control and production standards required in the cleanroom industry.

Source: RHB Invest Research - 29 Oct 2020