Wednesday, November 6, 2013

Riverstone: Diamond In The Rough (DMG)

Riverstone Holdings
Target Price: SGD1.05
Price: SGD0.75
Diamond In The Rough

 A hidden gem, Riverstone is a nitrile glove maker set to be the next big thing. This river stone is ready to be polished into a true jewel as: i) booming demand and expanding capacity make for exciting growth, ii) a wide investment moat protecting its niche, and iii) solid financials and management. We initiate coverage with a BUY and SGD1.05 TP, based on a 16.3x industry average blended forward FY13/14 P/E.

• Booming demand, growing capacity make for exciting growth story. We believe that Riverstone’s on-going expansion will catapult the company into the big league. Demand for its cleanroom products look extremely robust, with the existing demand for premium nitrile gloves set to remain stable and its new product cracking open new markets. On the healthcare side, Riverstone’s European customers are increasingly asking the company to boost capacity to help them diversify their supplier base, which may potentially triple orders. If the company achieves its plan of expanding to an annual production capacity of 8.0bn pieces in FY19, we expect its earnings to grow at a CAGR of 22.4% starting from FY13, up more than 4.1x to MYR163.4m by then.

• A wide moat protects its niche. Riverstone’s: i) high brand equity, ii) dominant market share in the high-end nitrile cleanroom glove industry, iii) status as the sole supplier to hard disk drive (HDD) giants, and iv) years of R&D and business experience have led to a wide investment moat protecting the company’s business.

• Low valuation undeserved. Riverstone is trading at a 12.4x forward P/E, the cheapest vis-a-vis the 16.3x industry average, and 2.2x forward P/BV vs the industry’s 3.3x average. It also provides the highest yield. We believe that the company’s listing in Singapore rather than Malaysia – where glove stocks are better understood – is one reason why investors have missed its sparkle.

• Risks. These include: i) possible pricing pressure arising from expansion in healthcare glove capacity, ii) raw material price fluctuations, and iii) exposure to forex volatility.

Source/Extract/Excerpts/来源/转贴/摘录: DMG-Research,
Publish date: 04/11/13

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