TEAM 11 EQUITY RESEARCH

[Manufacturing Industry, Rubber Gloves Sector]

By Justin Lim, Samuel Tan, Sim Yi Jun, Teoh Mei Yi for
FNCE101 under Prof. Tan Eng Joo RSTON SP / AP4.SI
Date: 1-Oct-2014 Current Price: S$0.99 Recommendation:
Ticker: AP4.SI Target price: S$1.36
Change in forecast of Change in forecast of terminal growth rate
WACC 1.0% 1.5% 2.0% 2.5% 3%
Market Profile
52 week price 0.69 - 1.01 4.72% 1.39 1.54 1.74 2.04 2.50
range 5.22% 1.26 1.37 1.52 1.72 2.01
Average daily 271,348
volume 5.72% 1.16 1.25 1.36 1.50 1.70
As % of shares 0.0007323 6.22% 1.08 1.15 1.23 1.34 1.48
outstanding
Sharpe Ratio 4.39 6.72% 1.01 1.07 1.14 1.22 1.33
Expected 5.97% Source: Team Estimates
Return
Volatility (SD)
2013 dividend
6.82%
2.761% Highlights
yield
Shares 370,542,000 Riverstone: The Investment That Fits Like A Glove
outstanding
Market 371.23M
capitalization • Recommendation and target price
Institutional 684,000 We issue a BUY recommendation on Riverstone Holdings (RSTON: SP) with a target price of
holdings $1.36 using the Discounted Free Cash Flow to Firm (DCF) and Price Multiples methods. This
BV per share 0.3536
ROE 2013E 17.97
provides an upside of 37.22% from its closing price of $0.99 on October 1, 2014. With its
Debt to capital 0.179 defensive core business and rising demand from the cleanroom and healthcare sectors,
2013E Riverstone’s profit and value is set to increase.
P/BV 2.918
P/E 16.24
• Main price growth drivers
Source: Team Estimates, Yahoo
Finance (1) Robust pipeline of deals with the increasing demand from the cleanroom and healthcare sector
resulting in a 5% and 4% growth in volume respectively. (2) Expansion plans to meet timely
demand, ease constraints and increase utilization rate. (3) Impressive financial performance over
Valuation DCF Multiplier the years with high liquidity, increasing profits and constant dividend payout ratio.
Estimated S$1.56 0.89
price
Weights 70% 30% • Ratio Analysis
Target $1.36 (1) High liquidity ratios relative to competitors, indicating more flexibility in managing cash
price flows. (2) Lowest debt-equity ratio amongst peers, indicating low usage of debt leverage. (3)
Source: Team Estimates Relatively high net profit margin, which is expected to increase over the next few years.

• Main Risks
Risk-Return Benchmarking vs STI
Keen competition in nitrile gloves pose the biggest threat. Over dependence on HDD and
STI Riverstone
semiconductor industry will be reduced as Riverstone expands its gloves to other product classes.
Expected 9.14% 33.8% Raw material prices of rubber and crude are currently favourable. Revenue streams are subject to
Return significant USD exposure.
(Annual)
Volatility 6.53% 6.82%
Beta 1.00 0.40
Sharpe 1.06 4.39
Ratio AP4.SI Daily Stock Prices (SGD)
Source: Team Estimates 1.50 S$1.36
1.30
37.4% Upside
Figure 1: Revenue mix from products 1.10
3% 0.90 $0.99
7%
0.70
0.50
0.30
90%

Nitrile Gloves
Natural Latex Gloves
Other non-gloves Consumables

Source: Company data

 Business Description
Figure 2: Revenue by Country
12% Riverstone Holdings Limited is a company, which specializes in the production of Cleanroom and
Healthcare gloves, fingercots, facemasks and packaging bags. Established in 1991, it has since
9%
35% grown to be the leading global supplier of Cleanroom and Healthcare gloves. Riverstone
currently exports more than 85% of their products to key high technology customers in Asia, the
15%
Americas and Europe. We identified their key strength to be their strong focus on research and
30% development, translating into a multitude of benefits. Riverstone is now working on expanding
their production capacity by upgrading their current facilities as well as developing new ones.
Europe Southeast Asia
China Other parts of Asia
Rest of the World The Current strategy of the Company is 6-pronged:
Source: Company data • Expansion of production facilities – By adding more dipping lines, cleanrooms and floor
space, it can help to increase efficiency while increasing production volume.
Figure 3: P/L Statement FY2013
• Focus on product development – Cater to a broader market and expand their business. By
Thousands
$- $200 $400 focusing on product development, Riverstone can expand its product range to cater to various
industries and better meet the demands and needs of the industry and their customers.
Rev. • Enhancement of value-added services – maintaining Riverstone’s good customer
COS
relationships through services like technical support and responsive after-sales support.
Gross Profit
Other Inc. • Enhancement of production process – Upgrade current production, laboratory testing,
Selling research and development facilities and better management of manufacturing process. Able to
Gen. & Admin.
better meet demands and utilize their resources.
Other
EBIT • Penetration into new industries, expansion of sales network, enhancement of brand
Interest awareness.
EBI
• Joint ventures and acquisition.
Taxes
NI
Industry Overview and Competitive Positioning
Source: Company Data
High barriers to entry from qualifications and quality controls and competition
Quality control checks on cleanroom gloves are significantly more stringent that nitrile gloves.
Certifications and the time incurred to obtain these certifications create high barriers to entry.
Moreover, there are many established players in the healthcare glove industry, resulting in
competitive pricing.

Volatility of raw materials and other costs

The prices of the raw materials needed to make cleanroom gloves are volatile. Along with rising
labor and fuel costs, given the competitive nature of the industry, producers are unable to pass on
higher costs to consumers in light of the highly competitive pricing within the industry.
Figure 4: Debt to equity ratio peer
comparison
0.53 0.53
Resilient Demand
In view of the growing emphasis on health, occupational safety and hygiene in the medical field,
0.3 the demand for healthcare gloves is strong. Users are willing to pay for quality, value-added
0.23
0.18 service and customization, translating into a constant demand for the healthcare gloves.

Favourable position in market

Riverstone’s cost efficient operation structure that consists of integrated manufacturing facilities,
in-house research and development and laboratory testing facilities come together to give
Riverstone an edge over their competitors.

Source: Company Data Diversity of market segments

Figure 5: Cash Conversion Cycle
Days' Sales in Inventory
Days' Sales in Receivables
Days' Sales in Payables
Cash Conversion Cycle
Riverstone’s products can be used in a variety of markets, such as the electronics, biotechnology
and pharmaceutical markets to name a few. By having products that can be used and sold in
various markets, this helps diversify the risk of relying heavily on a single market for sales.
High quality and production standards in meeting customer needs
Riverstone’s products have multiple certifications, testifying for their stringent quality control to
follow industry standards. This has allowed them to export their products worldwide. Moreover,
they believe in the establishment of close and direct contact with their customers, giving them a
better understanding of the customers needs to cater to their demands in a timely manner.

Financial Analysis
As seen from the figures (Appendix 1 & 2), Riverstone has higher liquidity ratios as compared to
Source: Company Data its competitors, with its cash ratio being the highest at 2.54. Riverstone’s high liquidity is a result
of minimal debts taken, be it short-term or long-term, which is reflected in the higher ratio of
assets to liabilities. With high liquidity, Riverstone is able to direct its cash flows flexibly to adapt
 Figure 6: Total asset turnover peer to the company’s different strategic needs and market changes. For instance, it is able to finance
comparison
new projects easily with their own funds without having to take on debts. Additionally,
Riverstone’s high liquidity reduces the risk of it facing financial distress during cyclical periods.
Riverstone 1.67

Hartalega 1.1
Financial Leverage: lowest usage of leverage amongst peers
The debt-to-equity ratio of Riverstone is the lowest as compared to its competitors. This is
Kossan Rubber 1.18 contributed by the fact that Riverstone takes on minimal debt, thus leading to a lower ratio.
Having said that, this leaves Riverstone with a high potential of debt financing, which would free
Top Glove 1.31
up Riverstone’s assets, allowing them to be put to better use. Riverstone’s impressive financial
Supermax 0.77 leverage position translates to high credibility and hence enables it to leverage on a larger scale if
necessary for further expansions.
Source: Company Data
Operating Efficiency: high asset turnover indicating efficiency of asset usage
Figure 7: Dividends per share declared Riverstone has a Cash Conversion Cycle (CCC) of 46.67 days, which is relatively low as among
0.08
its competitors. The only exception is Top Glove, as the company experienced an increase in
0.06 capacity utilisation due to an increase in demand for their nitrile gloves, which thus lowered their
days’ sales in inventory. A low CCC indicates that Riverstone is converting its products into cash
0.04 at a relatively more effective manner.
0.02
Furthermore, Riverstone’s total asset turnover is relatively high as compared to its industry
0 competitors, which indicates that Riverstone is utilizing its assets more efficiently to generate
2009 2010 2011 2012 2013 earnings relative to its competitors.
Source: Company Data

Profitability
Figure 8: DuPont Analysis With favourable raw material prices and the strengthening of the US dollar, Riverstone is
forecasted to continue its growth for the next 5 years. While the industry remains challenged by
increasing labour costs and competition, Riverstone is focused on improving its productivity
levels through the implementation of automation processes and effective management of
production lines. This is supported by their purchase of a 30-acre land in Taiping, Perak to
supplement their expansion plans, which would potentially add an additional one billion pieces of
gloves. With a net profit margin of 16.2%, Riverstone is better able to generate profits as
compared to its competitors, lest for Hartalega. However, Riverstone’s strong focus in R&D as
well as increasing production capacity would allow Riverstone to improve its net profit margin
Source: Company Data
due to increased efficiency and lower costs of production.

Dividend Payouts
Riverstone has a history of high constant dividend payout ratio. In fact, it has the highest among
Figure 9: Malaysia’s export of surgical its competitors, indicating that Riverstone is able to support its dividend payments well using its
gloves in RM millions earnings. The stability of Riverstone’s dividends is considered a desirable policy as it has a
positive impact on the market price of a share. Having a constant dividend payout ratio also
1500
guarantees Riverstone against over or under payment.
1000
Du Pont Analysis
500 Riverstone has achieved high return on equity relative to its peers at 17.97% in 2013. The main
0 drivers were high equity multiplier, and asset turnover. Our analysis shows impairment in ROE
forecasts for 2018 at 16.71%. Profit margin is set to increase over the years as a result of
2006
2007
2008
2009
2010
2011
2012
2013

increasing utilization rate, which decreases cost of goods sold. However, asset turnover is reduced
Source: Malaysia Rubber Gloves as efficiency peaks in the next few years. Our Dupont Analysis reveals that the most important
Industry Estimates driver for sustaining its original ROE is asset turnover.

Investment Summary
Good upside potential
Figure 10: Mobile and desktop growth We issue a BUY recommendation on Riverstone Holdings (RSTON: SP) with a target price of
forecast to 2017
$1.36 using the Discounted Free Cash Flow to Firm (DCF) and Price Multiples methods. The
600,000 target price was obtained via sum of the parts and it offers a 37.22% upside from its closing price
of $0.99 on 1th October 2014. Riverstone is able to capitalize on its defensive core business and
400,000 tap on the rising demand from electronic industries and healthcare sector in the emerging markets
through expansion. Its expansion through the recent acquisition of a 30-acre plot of land in
200,000
Taiping, Malaysia in 2013 will enable Riverstone to increase its capacity to meet the rising
0 demand. Additionally, it will ease constraints and increase utilization rate in the process. This
opportunity will serve to drive its revenue further and maximize firm’s value.
2011

2013

2015
2010

2012

2014

2016
2017

Mobile Desktop
Riverstone’s core business of gloves manufacturing is highly defensive because:
Source: Coughlin Associates (1) Gloves is a basic necessity in the cleanroom and healthcare sector
(2) Riverstone is the market leader in high end cleanroom gloves, commanding 60% of the
global market share
 Figure 11: Tablet, Mobile and PC
forecast (billions)
Rising demand from current cleanroom sectors, new cleanroom sectors and regulations
3 The semiconductor and electronics industries, being the leading buyers of cleanroom
consumables, are expanding. The World Semiconductor Trade Statistics has forecasted a CAGR
2 of 5% over FY2014E to FY 2016E after its lacklustre growth in 2011 to 2012. The growth is a
result of the increase in demand for both high-end and low-end cleanroom gloves from Hard Disk
1
Drive (HDD), tablets and smartphones.
0
2013 2014 2015F • Current cleanroom sales expected to expand from HDD cleanrooms
Demand for high-end cleanroom gloves is forecasted to increase despite a flat demand in
Tablets Mobile PCs Total
2013. Coughlin Associates expects a recovery beyond 2013 due to the continued need for
Source: Coughlin Associates affordable storage for the rapidly increasing content. The projections of increasing HDD
through 2017 with unit shipment growth of 11% will prove to drive demand for high-end
cleanroom gloves. This is exceptionally significant as Riverstone’s main clients who include
Figure 12: Total government
Seagate and Western Digital (WD) take up a combined market share of 82% – 88% in the
expenditure on healthcare per capita
HDD industry.
2200

2000 • Newer sales segments expected to expand from smartphone and tablet cleanrooms
1800
Tablets and smartphone manufacturing have been projected to proliferate, driving demand for
low-end cleanroom gloves. IDC predicts smart connected device market like tablets and
1600
smartphones to have a YoY growth of 12% to stay abreast of mobile customer requirements.
1400 Similarly, this growth is also significant as the glove type accounts for nearly 40% of
2008 2009 2010 2011 2012
cleanroom sales in Q2013.
Source: WHO
• More regulations increasing the need for cleanroom gear
Figure 13: Rising middle class in China Increasing regulations concerning the quality of products and safety of work personnel will
also drive overall growth in the cleanroom sector.
120
100 Lucrative prospects in the growing healthcare sector from emerging markets and
Percentage

80 pandemics
60 Deloitte expects total global healthcare spending to rise by an average of 5.3% each year from
40 2014 to 2017. The increased government budget will focus on delivering higher quality healthcare
20 services in the wake of ageing population, increase in consumers’ income and rising prevalence of
0
chronic diseases.
2012 2020
Affluent • Emerging markets demanding better healthcare
Upper middle class
Mass middle class Prospects of the global healthcare sector in emerging markets like China and Indonesia are
Source: Mapping China’s Middle generally optimistic where spending is expected to be higher than in developed markets. This
Class, Mckinsey 2013 is due to greater expectations in the quality of healthcare with ageing population and
increased consumers’ wealth. China and Indonesia, being part of Riverstone’s market reach,
have shifted its priority towards primary healthcare with spending increasing at a rate of 10%
Figure 14: Riverstone production
capacity in millions - 14% a year. This promising annual growth is likely to push demand for healthcare gloves
4000 and will serve as an impetus for Riverstone’s revenue.
3000
• Global disease outbreaks
2000
In retrospect, different epidemics like H1N1 have previously led to spikes in demand for
1000 healthcare gloves. On 30th September 2014, the first case of Ebola in United States was
0 confirmed. With the growing concern of Ebola turning into an epidemic, there is a likelihood
that it could lead to a similar spike in demand, which could drive Riverstone’s revenue.
Scientists warn that this outbreak will take a long time to contain.
Source: Company data
Planned expansions will meet growing demand and enhance specialization capabilities
Figure 15: Demand for gloves in
response to pandemics Riverstone has acquired a 30-acre plot of land located in Taiping, Malaysia in April 2013 to
(% YoY) support business expansion and ease constraints. The acquisition of land enables Riverstone to
25
support production of 1 billion gloves each year, adding additional capacity to its 3.1 billion glove
SAR
S capacity at the end of 2013. This significant improvement in capacity is to be executed in 5 phases
20
H1N1
with the addition of 6 new lines in each phase. The first two lines are scheduled to begin
15 H5N1 Ebola production at end September 2014 while the remaining 4 are announced to commence in the
10 fourth quarter of 2014.
5 MER
0 S • Expansion plans are timely to meet demands
-5 Increase in capacity will enable Riverstone to meet the increasing demand from the
cleanroom and healthcare sector. This is of utmost importance as Riverstone’s inability to tap
Source: Malaysia Rubber Export
Promotion Council
on the trend will result in loss of profit. In fact, Riverstone’s CEO has forecasted a double in
capacity by end 2016 after the completion of 6 lines, taking the capacity to a level of 6.2
billion gloves. Riverstone’s CEO has also assured that demand for the next billion gloves has
 already been taken up, raising investors’ level of confidence.

• Line for line customization a consequence of economies of scale

Capacity expansion allows Riverstone to reconfigure its glove dipping lines to match
individual clients’ requirements. With individual lines dispatched to individual customers,
Figure 16: Historical free cash flows better quality control can be expected. Moreover, costs savings will be realized as it reduces
changeover time since production lines need not be reset for different clients’ gloves making.
100
This economies of scale will increase overall utilization and decrease the cost of goods.
80
MYR (millions)

Net OCF A Strong Balance Sheet as a Foundation for Growth

60 The strength of the Riverstone’s balance sheet is evaluated based on its high liquidity as well as
low levels of debt. These two considerations put Riverstone in a good stead as it gives the
40
company financial power to invest in new ventures or tide over financial crisis. This is extremely
20 CapEx relevant since its clients are HDD and smartphone manufacturers who have cyclical demand. The
FCF
strong balance sheet also serves to reiterate the high and constant dividends payout, making
0 Riverstone an attractive buy.
2009 2010 2011 2012 2013
Source: Company Data
Valuation
Figure 17: Historical growth rate
DCF Valuation
400 80 The Discounted Free Cash Flow to Firm (DCF) method is applied to free cash flows to derive the
Sales Net Profit
enterprise value, thereby obtaining the value per common share of $1.56. The application of DCF
involves the breaking down of Riverstone’s revenue drivers: (1) Healthcare gloves (2) Cleanroom
300 60
gloves (3) Other cleanroom consumables and reconstituting these projections to obtain the
projected free cash flows for five years.
200 40
• Core Distribution Business
100 20 Volume (gloves) - Year-to-year forecast assumptions for the next 5 years are based on the
projected growth rates from research reports. Cleanroom sector is expected to grow at 5% while
0 0 healthcare sector is expected to grow at 4%.
2009 2010 2011 2012 2013
Price (gloves) – Price of gloves is forecasted to decrease 2% for the first two years due to a
Source: Company Data potential risk of oversupply in the gloves industry, which could possibly result in a decrease in
average selling prices (ASP) of gloves.
Figure 18: Breakdown of costs
• Terminal Growth Rate
Terminal growth rate was based on Malaysia’s GDP growth rate where it is assumed that
24% 30% Riverstone would not outperform the country’s growth rate when it enters the mature phase.

7% • Weighted Average Cost of Capital (WACC)

15%
15%
Cost of equity was derived using the CAPM where a regression was done for Riverstone against
9% STI. The risk free rate of 3.87% was based on the current yield of 10 year Malaysia Government
Raw Materials Fuel
Bond while the market rate of return is 9.14% based on STI annualized returns from 2007. With
Labour Utilities the above components, a cost of equity of 5.97% was achieved. Also, the weighted average after
Chemicals Others tax cost of debt of 2.22% was based on past interest bearing short-term liabilities taken up by
Riverstone. Applying these constituents, we attained a WACC of 5.72%.
Source: Company Data
Peer Group Pricing: Relative Valuation
In addition to the DCF method, the price multiples approach was also taken into consideration to
capture the long-term growth opportunities and market sentiments respectively (see Appendix 8).
Figure 19: Trade credit with other
countries
The strongest competitor identified in the market is Hartalega who is also the main leader.
China Riverstone trails behind Hartalega in terms of Net Profit Margin, ROA and ROE. This is a result
5% Malaysia
3%3% 18% Thailand of Hartalega’s proprietary technology that enables it to achieve high utilization and profit margin.
4%
United Kingdom
6% United States Nevertheless, with its expansion plans to increase utilization and continual investment of RM 3 –
9% 15%
Germany
Sweden
4 million in research and development, it is likely for Riverstone to achieve equivalent or even
Japan better ROA and ROE as projected in the financial model.
12% Singapore
13% Philippines
12% Other countries
Investment Risks
Source: Company Data Market Risk: Keen competition and pending oversupply condition in nitrile gloves can
potentially leave cleanroom gloves as the core business
Keen competition from Riverstone’s top four glove producers poses a risk to Riverstone’s market
Figure 20: Prices for rubber, crude and
NBR nitrile share. All four of Malaysia’s glove producers, and Riverstone’s competitors as identified by
Marketline, have been expanding rapidly. Hartelega and Supermax are building new facilities that
 are to be completed in the short and medium term. For example, Hartalega, the market leader in
nitrile gloves, is building its next generation integrated glove manufacturing complex (NGC) in
Sepang with a capacity of 28 billion per year.

This oversupply could drive down average selling prices. Although Riverstone has a focus in the
nitrile glove’s industry, with 70% of its revenue deriving from these products, its main
differentiating point is the focus on the clean room segment where Riverstone commands a
premium, as opposed to the medical gloves sector where these supply conditions are occurring.
This may reduce the severity of this imminent threat.

Market Risk: Susceptibility to cyclical demand of HDD and semiconductor industry

Source: Malaysian Rubber Board,
Since Riverstone is likely to be dependent on cleanroom gloves, which comprises 30% of its sales
Infomine
revenue, future revenue streams will be tied to the conditions of the semiconductor and hard disk
manufacturing industrial performance. The diversification into the tablet, flat panel and mobile
segments, as announced in the 2013 annual report, might reduce product class specific exposure.

Economic Risk: Fluctuations in forex and country specific credit risks

Much of Riverstone’s revenue comes in the form of USD. But also has exposure to a range of
other currencies as well. This means susceptibility to the USD forex movements and affecting
events. Riverstone also has significant trade debts with China, Malaysia, Thailand, UK and US,
resulting in susceptibility to economic conditions in those countries on top of forex movements.

Operational Risk: Changes in cost of raw materials

Raw materials rubber and butadiene comprise 30% of Riverstone’s costs. Rubber prices have
been suppressed by severe oversupply due to the Thai Government’s previous policy to buy
rubber at a guaranteed price, resulting in government stockpiles and production surpluses. This is
to Riverstone’s favor. US stockpiles of oil are at the higher end of the average. Benign crude oil
prices have fallen, indirectly benefiting Riverstone, as Butadiene, the main raw material, is a
derivative of crude. However, it is yet to be known whether developments in the middle east will
reverse this trend. Prices of both rubber and oil are expected to persist at low prices for the
medium term.
Appendix 1: Trend Analysis of Riverstone’s Ratios
Ratios 2009 2010 2011 2012 2013
Profitability
EBITDA Margin 25.96% 24.16% 20.12% 20.50% 24.98%
Operating Profit Margin 20.31% 19.36% 15.04% 15.29% 19.68%
Net Profit Margin 18.97% 18.23% 14.16% 12.80% 16.20%
Return on Assets 15.10% 16.84% 14.43% 12.53% 15.24%
Return on Equity 17.23% 20.16% 17.24% 15.57% 17.97%
Liquidity
Current Ratio 5.54 3.45 3.59 3.13 4.79
Quick Ratio 4.60 2.66 2.72 2.52 3.99
Cash Ratio 2.52 1.30 1.15 1.29 2.54
Activity
Cash Conversion Cycle 91.24 62.42 70.52 45.16 46.67
Total Asset Turnover 1.50 1.89 2.10 1.99 1.67
Fixed Asset Turnover 1.70 1.81 1.98 1.92 2.16
Financial Leverage
Debt to Equity Ratio 0.14 0.20 0.19 0.24 0.18
Shareholder Ratios
Earning per Share 9.50 13.00 12.20 12.20 16.00
Dividend Payout Ratio 44.8% 38.5% 48.5% 48.6% 38.7%

Appendix 2: Comparative Analysis of Ratios

Ratios (2013) Riverstone Hartalega Kossan Rubber Top Glove Supermax
Profitability
EBITDA Margin 24.98% 32.63% 18.00% 13.98% 17.41%
Operating Profit Margin 19.68% 29.55% 14.10% 10.50% 14.86%
Net Profit Margin 16.20% 22.63% 10.71% 8.77% 11.35%
Return on Assets 15.24% 24.84% 12.66% 11.45% 8.69%
Return on Equity 17.97% 30.55% 19.40% 14.94% 13.26%
Liquidity
Current Ratio 4.79 3.25 1.80 2.01 1.86
Quick Ratio 3.99 2.54 1.26 1.41 1.26
Cash Ratio 2.54 1.49 0.36 0.34 0.52
Activity
Cash Conversion Cycle 46.67 56.52 91.57 40.25 92.01
Total Asset Turnover 1.67 1.10 1.18 1.31 0.77
Fixed Asset Turnover 2.16 1.35 2.18 2.49 2.01
Financial Leverage
Long-term Debt to Assets - 0.00487 0.11 0.00159 0.09
Long-term Debt to Equity - 0.00599 0.17 0.00207 0.14
Debt to Equity Ratio 0.18 0.23 0.53 0.30 0.53
Interest Coverage - 337.68 26.78 331.43 20.41
Shareholder Ratios
Earning per Share 16.00 31.88 21.33 31.72 17.63
Dividend Payout Ratio 38.7% 37.41% 32.82% 28.95% 28.54%

Appendix 3: Riverstone’s Pro Forma Income Statement

INCOME  STATEMENT  
Financials in MYR('000)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018/TY
At 31 Dec 20xx
Revenue 155,730 221,544 272,747 309,815 357,942 362,635 367,400 372,237 388,456 405,413
Healthcare gloves 169,576 172,713 175,908 179,163 188,121 197,527
Cleanroom gloves 176,800 178,356 179,925 181,509 188,769 196,320
Other Cleanroom
11,566 11,566 11,566 11,566 11,566 11,566
products
(Increase)/ Decrease in
5,128 9,019 4,850 1,196 (5,261)
inventories
Cost of Goods 106,633 157,211 211,116 238,248 260,131 260,715 259,656 259,353 266,768 274,359
Gross Profit Margin 31.53% 29.04% 22.60% 23.10% 27.33% 28.11% 29.33% 30.33% 31.33% 32.33%
Gross Profit 49,097 64,333 61,631 71,567 97,811 101,920 107,743 112,884 121,687 131,053
Selling and Distribution
8,668 10,802 6,743 8,066 8,382 8,492 8,603 8,717 9,097 9,494
expenses
Depreciation expense 8,803 10,647 13,854 16,133 18,988 18,893 19,142 19,394 20,239 21,122
Finance costs - - - - - - - - - -
Net Operating Income /
31,626 42,884 41,034 47,368 70,441 74,535 79,998 84,774 92,352 100,438
EBIT
Other income 679 830 1,902 949 2,185 2,473 2,977 3,538 4,037 4,618
Interest expense on
69 5 35 - - - - - - -
borrowings
Profit/(loss) before
32,236 43,709 42,901 48,317 72,626 77,007 82,975 88,312 96,389 105,055
income tax
Income (expense)/tax
(2,700) (3,327) (4,277) (8,662) (14,645) (14,182) (14,380) (14,581) (15,228) (15,905)
credit
Net profit/(loss) for the
29,536 40,382 38,624 39,655 57,981 62,825 68,595 73,732 81,162 89,150
year
 Company attributable to:
Revenue                      
 
62,825
 
 
68,595
 
 
73,732
 
 
81,162
 
 
89,150
Non- Controlling Interest - - - - -
Total 62,825.2 68595 73732 81162 89150

Appendix 4: Riverstone’s Pro Forma Balance Sheet

BALANCE SHEET
Financials in MYR('000) 2018/
2009 2010 2011 2012 2013 2014 2015 2016 2017
At 31 Dec 20xx TY
Assets
Current Assets
Cash and cash
47,190 44,149 41,570 63,987 114,004 122,198 147,110 174,860 199,530 228,214
equivalents
Trade receivables and
38,898 46,216 56,793 61,112 65,031 75,830 76,827 77,838 81,230 84,776
other current assets
Inventories 17,733 26,752 31,602 30,406 35,667 39,154 38,995 38,949 40,063 41,203
Total Current Assets 103,821 117,117 129,965 155,505 214,702 237,183 262,932 291,647 320,822 354,193
Non-Current Assets
Investments in
- - - - - - - - - -
subsidiaries
Property, plant and
91,816 122,730 137,675 161,014 153,384 155,395 157,437 159,510 166,460 173,726
equipment
Other asset - - - - 12,421 22,980 33,539 44,098 54,657 65,216
Goodwill / Intangibles - - - - - - - - - -
Total Non-Current
91,816 122,730 137,675 161,014 165,805 178,375 190,976 203,608 221,117 238,942
Assets
Total Assets 195,637 239,847 267,640 316,519 380,507 415,558 453,907 495,255 541,939 593,135
Liabilities and
Equity
Current Liabilities
Short-term borrowings 489 226 509 - 308 - - - - -
Trade and other payables 17,713 32,661 34,773 47,926 39,276 39,364 39,204 39,159 40,278 41,424
Income tax payable 490 1,052 921 1,762 5,271 5,271 5,271 5,271 5,271 5,271
Current portion of long-
- - - - - - - - - -
term borrowings
Hire purchase creditors 42 14 8 - - - - - - -
Total Current Liabilities 18,734 33,953 36,211 49,688 44,855 44,635 44,475 44,430 45,549 46,695
Net Current Assets 85,087 83,164 93,754 105,817 169,847 192,547 218,456 247,218 275,273 307,497
Non-Current Liabilities
Deferred tax 5,210 5,626 7,414 12,194 12,993 12,993 12,993 12,993 12,993 12,993
Long-term borrowings 224 - - - - -
Hire purchase creditors 22 8 - - - - - - - -
Long-term provision - - - - - - - - - -
Total Non-Current
5,456 5,634 7,414 12,194 12,993 12,993 12,993 12,993 12,993 12,993
Liabilities
Total Liabilities 24,190 39,587 43,625 61,882 57,848 57,628 57,468 57,423 58,542 59,688
Net Assets 171,447 200,260 224,015 254,637 322,659 357,929 396,439 437,832 483,397 533,446
Capital and Reserves
Share capital 106,788 110,129 113,242 123,846 156,337 156,337 156,337 156,337 156,337 156,337
Treasury shares -- -- -- (97) (815) (815) (815) (815) (815) (815)
Other reserves (54,853) (52,711) (51,722) (51,860) (51,022) (51,022) (51,022) (51,022) (51,022) (51,022)
Retained earnings 119,509 142,838 162,491 182,744 218,155 253,425 291,935 333,328 378,893 428,942
Non controlling interest 3 4 4 4 4 4 4 4 4 4
Dividends 13,237 15,571 18,738 19,304 22,455 27,555 30,086 32,338 35,597 39,101
Total Equity 171,447 200,260 224,015 254,637 322,659 357,929 396,439 437,832 483,397 533,446

Total Liabilities and 195,637 239,847 267,640 316,519 380,507 415,558 453,907 495,255 541,939 593,135
Equity

Appendix 5: Riverstone’s Pro Forma Cash Flow Statement

CASH  FLOW  STATEMENT  
Financials in MYR('000)
At 31 Dec 20xx
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018/TY
Cash From Operating
Activities
Net profit/(loss) before
income tax
32,236 43,709 42,901 48,317 72,626 77,007 82,975 88,312 96,389 105,055
Adjustments for:
Depreciation expense 8,803 10,647 13,854 16,133 18,988 18,893 19,142 19,394 20,239 21,122
Fair value loss/ (gain) on -- -- 509 (1,172) 971 -- -- -- -- --
derivatives
PPE written off 46 2 34 6 4 -- -- -- -- --
Interest income (296) (139) (174) (298) (659) (2,473) (2,977) (3,538) (4,037) (4,618)
Interest expense 69 35 5 -- -- -- -- -- -- --
(Gain)/ loss on disposal of
PPE
(58) 87 1 6 7 -- -- -- -- --
Trade receivables written
off
-- 320 52 -- 13 -- -- -- -- --
OCF before NWC 40,800 54,661 57,182 62,992 91,950 93,428 99,140 104,168 112,591 121,560
Less Changes in:
Receivables and
prepayments
(10,549) (7,537) (10,591) (3,724) (4,666) (10,799) (996) (1,012) (3,391) (3,546)
Inventories 5,128 (9,019) (4,850) 1,196 (5,261) (3,487) 159 46 (1,114) (1,140)
Payables and accruals 6,408 14,948 2,112 1,740 7,826 88 (160) (46) 1,120 1,146
Short term borrowings (308)
Cash generated from  
41,787  
53,053  
43,853  
62,204  
89,849 78,922  
98,143  
103,156  
109,205  
118,020
operations
Interest paid (69) (35) (5) - - - - - - -
Interest received 296 139 174 298 659 2,473 2,977 3,538 4,037 4,618
Income tax paid (1,426) (2,450) (2,658) (2,973) (10,266) (14,182) (14,380) (14,581) (15,228) (15,905)
Net cash generated from
operating activities
40,588 50,707 41,364 59,529 80,242 67,213 86,740 92,113 98,015 106,733
Cash From Investing
Activities
Purchase of property, plant
and equipment (Capex)
(26,857) (42,136) (28,940) (28,300) (29,472) (20,904) (21,183) (21,467) (27,188) (28,388)
Proceeds from disposal of
property, plant and 308 210 1 116 56 - - - - -
equipment
Instalments paid for
purchase of land
-- -- -- -- (10,559) (10,559) (10,559) (10,559) (10,559) (10,559)
Net cash used in investing
activities
(26,549) (41,926) (28,939) (28,184) (39,975) (31,463) (31,742) (32,026) (37,747) (38,947)
Cash from Financing
Activities
(Repayment of)/proceeds
from issue of shares
- 3,181 2,969 10,123 31,032 - - - - -
Dividends paid (13,237) (15,571) (18,738) (19,304) (22,455) (27,555) (30,086) (32,338) (35,597) (39,101)
Treasury shares purchased - - - (97) (718) - - - - -
Hire purchase (net) (82) (42) (14) (8) - - - - - -
Repayment of term loans (689) (487) (226) - - - - - - -
Proceeds from issue of
warrants
- 2,244 - - - - - - - -
Financing activities (14,008) (10,675) (16,009) (9,286) 7,859 (27,555) (30,086) (32,338) (35,597) (39,101)
Net effect of exchange rate
changes
633 (1,147) 1,005 358 1,891 -- -- -- -- --
Net (decrease)/increase
in cash and cash 31 (1,894) (3,584) 22,059 48,126 8,194 24,912 27,749 24,670 28,684
equivalents
Cash and cash equivalents
at the beginning of the year
46,526 47,190 44,149 41,570 63,987 114,004 122,198 147,110 174,860 199,530
Cash and cash
equivalents at the end of 47,190 44,149 41,570 63,987 114,004 122,198 147,110 174,860 199,530 228,214
the year

Appendix 6: DCF Valuation

Free Cash Flow to Firm (FCFF)
All values in '000 At 31 Dec 20xx
Assumptions
Terminal Growth Rate 2.00% Malaysia GDP Growth Rate
WACC 5.72%

Financials in MYR('000) At 31 Dec 20xx 2014 2015 2016 2017 2018/TY

Revenue 362,635 367,400 372,237 388,456 405,413
EBIT 74,535 79,998 84,774 92,352 100,438
Add: Depreciation/Amortization expense 18,893 19,142 19,394 20,239 21,122
Less: Total Capex 20,904 21,183 21,467 27,188 28,388
Less: Changes in Non-Cash Working Capital 22,700 25,909 28,761 28,056 32,224

Free Cash Flow to Firm 49,823 52,048 53,940 57,347 60,947

Discount Time 1.00 2.00 3.00 4.00 5.00

Discount Factor 0.99 0.93 0.88 0.83 0.78

NPV 49,117.96 48,459.52 47,430.35 47,623.81 1,359,162.64

Enterprise Value 1,551,794.27
Net Cash / (Debt) 56,156.00
Equity Value 1,607,950.27

Weighted Average of Outstanding Shares 371,230,000

Fair Value of Share in MYR $4.33
Current exchange rate (MYR to SGD) 0.36
Target Price in SGD $1.56        
Current Price $0.99
Upside 57.51%
Valuation Date 1-Oct-14
Date Range 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18
Days 91 456 821 1186 1551

Sum of the parts:

FCFF $1.56
Weightage 70.00%
Pricing Multiples 0.89
Weightage 30.00%
Final Target Price: $1.36
Current Price: $0.99
Upside: 37.22%
Valuation Date: 1-Oct-14

Appendix 7: Deriving Unadjusted Beta (Based on Monthly Data)

Riverstone returns

25.00%
20.00%
15.00%
10.00%
5.00%
STI returns
0.00%
-30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00%
-5.00%
-10.00% y = 0.0978x + 0.0238
-15.00% R² = 0.00704

Appendix 8: Relative Valuation via Pricing Multiples Approach

Total Net
Market Cap Dividend
(USD ‘ Mil) Revenue Profit ROA ROE PE
(SGD) Yield
(mil) Margin
Riverstone 352.5 143.18 16.20% 15.20% 18.00% 14.9 3.00%
Hartalega 1,813.75 412.81 22.63% 24.82% 30.55% 20.2 2.30%
Top Glove 1096.25 925.29 9.17% 11.45% 14.90% 14.3 3.40%
Kossan
522.92 10.71% 12.70% 19.40% 16.8 2.70%
Rubber 916.25
Supermax 562.5 419.26 11.35% 8.69% 13.26% 11.3 2.90%
Peer
Average 942.85 484.69 14.01% 14.57% 18.09% 15.5 2.86%

Appendix 9: Sensitivity Analysis