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Report by CIMB.
Riverstone specialises in the manufacturing and supplying of cleanroom gloves, finger cots and packaging materials for the highly-controlled and critical cleanroom environments. Gloves are supplied to the Hard Disk Drive (HDD) and semiconductor industries which account for 58% of the global gloves purchase.
Cleanroom gloves users often stick to one supplier to ensure consistency in quality after the long qualification process. Riverstone supplies 100% of the requirement of 4 out of the 6 leading HDD manufacturers in the world. Riverstone has around 60% of the HDD world's market share, which implies an 8-9% of the global market share for cleanroom gloves.
Expecting a FY08-10F CAGR growth of 19%. Production capacity to double from 720 to 1400m pieces of gloves. Roll out of new higher premium products (co-polymer and polyurethane gloves) and services (reconditioning of gloves). Cross-selling of new complementary products (face masks and others in the pipeline) to existing customers ensures new revenue sources.
Risk of depreciating USD not to be negated. Assumed a base MYR/USD: 3.12 in our estimates against the 12-month forward of 3.14 (Bloomberg). Our sensitivity analysis shows that for every 1% decline in MYR/USD, 0.9% of the net profit will be shaved. Note that FY07 earnings was flat due mainly to 7% depreciation of USD against MYR during the period.
M&A imminent in near term. Riverstone stands out with its higher operating margins and ROE among some of the larger gloves makers in Malaysia. Sits on a large cash pile (36% of market cap) and trades at 8.1x FY09F ex-cash PE.
Initiating coverage on Riverstone with a BUY recommendation and a 12-month price target of $0.62(based on 0.4x FY09F earnings).