Riverstone Holdings (RSTON SP)
Share Price S$0.90
Target Price S$1.14
Global leader in the high barriers-to-entry, premium-priced cleanroom segment
Riverstone Holdings (Riverstone) is a leading manufacturer of customised healthcare gloves and a global supplier of high-tech cleanroom gloves with an estimated 60% share in the hard disk drive (HDD) market. It also produces other cleanroom consumables. Currently, Riverstone operates five manufacturing facilities in Malaysia (three), Thailand (one) and China (one), with a combined annual production capacity of 3.1b gloves.
• Global leader in the high barriers-to-entry, premium-priced cleanroom segment. Cleanroom gloves are made for special industrial applications conducted in a critical environment. They command ASPs that are 2.5-3x higher than healthcare gloves’ and gross margins of over 30% vs healthcare’s 15-20%. Riverstone’s long-standing, blue-chip customers include Western Digital, Seagate and Hitachi, some of whom source solely from the group.
• Tablet and mobile segment to drive demand for cleanroom gloves. Cleanroom volume is expected to sustain at least a 10% annual growth with upside to come from the tablet and mobile segment. Management has seen strong take-up for this line of products so far. Within cleanroom, contribution from the tablet and mobile segment had grown from 20% as of end-13 to 30% by 1Q14.
• Niche in high-end, customised healthcare gloves. The group’s smaller size compared with its Malaysian peers allows it to specialise in customised medical gloves without incurring significant losses in downtime. These gloves command slightly higher ASPs and enjoy more resilient demand as there are only a few qualified players that can take on such small customised orders. Annual demand for healthcare gloves is expected to continue growing 10% p.a. from the current 165b pieces.
• Growing demand to absorb 5b pieces in new capacity that will be added progressively beginning Jul 14. These will more than double the group’s production capacity to 8.2b pieces by 2018. Management intends to add 1b in new capacity every year, with phase 1 slated to be completed by end-14 and phase 2 to be operational by 3Q15. We expect incoming new capacity to be easily taken up by bigger orders from existing customers, who have already sent inquiries for higher volumes.
• Debt-free and cash-generative; well-positioned to support capex needs. With RM109m in cash (or 11.3 S cents/share) and RM80m in operating cash flow, phases 1-2 of the RM400m new factory will be funded internally. Subsequently, we estimate the group will need to borrow funds but we expect its gearing to be capped at 10% in 2015- 16. We expect the group to remain free cash flow positive.
• BUY with target price of S$1.14 pegged at the sector’s historical mean PE of 14x applied to our 2015 EPS of 8.2 S cents. The stock offers dividend yields of 3.5-4.7%.
Publish date: 06/06/14