Riverstone Holdings Limited - Stock Valuation

STOCK VALUATION LI YIYUN; SU CHANG; ZHENG YAYUAN

NATASHA SINGHAL; LONG HONGZHANG

G 4

G 4

CONTENT

INDUSTRIAL OUTLOOK

SWOT ANALYSIS

FINANCIAL ANALYSIS

RISK ANALYSIS & WACC

VALUATION

Background & Historical Analysis

Environment

Political and Legal

Economic Factors

Technology

Competitors

INDUSTRIAL OUTLOOK

INDUSTRIAL OUTLOOK

Background & Historical Analysis

Environment

Political and Legal

Economic Factors

Technology

Competitors

Background

Established: 1989 85% export to Americas , Asia and Europe Production plants in Malaysia , Thailand and

China Main Product:

Clean Room and Health care gloves Finger cots , face masks and packaging bags

Historical Analysis

Riverstone share price (Jan 2009 – Dec 2013)

1

2

4

5

3

1. Global economy faced recession

2. Good company performance

3. Stock markets fall

4. Higher sales of healthcare gloves

5. Production capacity expanding

INDUSTRIAL OUTLOOK

Background & Historical AnalysisEnvironment

Political and Legal

Economic Factors

Technology

Competitors

Environment

Rubber Product (in Thousand tones)

2008 2009 2010 2011 2012 2013

Other Gloves 5,991.92 6,279.86 7,930.10 8,817.02 9,489.20 9,363.22

Surgical Gloves 916.34 866.21 985.38 1,074.51 1,070.63 1,170.30

2008 2009 2010 2011 2012 20130.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

9,000.00

10,000.00

Other GlovesGloves

INDUSTRIAL OUTLOOK

Background & Historical Analysis

Environment

Political and Legal

Economic Factors

Technology

Competitors

INDUSTRIAL OUTLOOK

Background & Historical Analysis

Environment

Political and Legal

Economic Factors

Technology

Competitors

INDUSTRIAL OUTLOOK

Background & Historical Analysis

Environment

Political and Legal

Economic Factors

Technology

Competitors

INDUSTRIAL OUTLOOK

Background & Historical Analysis

Environment

Political and Legal

Economic Factors

Technology

Competitors

Competitors

• Mainly medical gloves

Supermax Corporation Berhad (1987)

• Mainly Latex gloves and technical rubber products

Kossan Rubber Industries Bhd (1979)

SWOT ANALYSIS

Strengths

Weakness

Opportunities Threats

SWOT ANALYSISStrengths• Established and reputable brand• Ability and willingness to meet

customers' needs • Strong financial position and no long

term debt• Niche business provides a wide moat• Enlarging capacity provides growth

opportunities and economies of scale• Sound management

Weakness

Opportunities

Threats

SWOT ANALYSIS

Strengths

Weaknesses• Expansion in healthcare gloves

capacity may exert pricing pressure• Inability to pass on full impact of

any cost increase

Opportunities

Threats

SWOT ANALYSIS

Strengths

Weaknesses

Opportunities• Demand for

cleanroom gloves to stay healthy

• Demand for healthcare gloves to grow by European

• Tablet and mobile device manufacturing

• Customized medical gloves to provide growth driver

Threats

SWOT ANALYSIS

StrengthsWeaknesse

s

Opportunities

Threats• Upstream price fluctuations may

lead to higher costs• Exposure to forex volatility• Slowdown in economy and

semiconductor related manufacturing

• Higher raw material costs• Foreign exchange risk

Profitability Analysis

Turnover Ratio

Liquidity Analysis

Solvency Analysis

FINANCIAL ANALYSIS

Profitability Analysis

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2012

Dec-31-2013

0

10

20

30

40

50

Gross Profit Margin

Riverstone Kossan Supermax

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2012

Dec-31-2013

0

5

10

15

20

25

30

ROE

Riverstone Kossan Supermax

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2012

Dec-31-2013

02468

101214

ROA

Riverstone Kossan Supermax

Profitability Analysis

Turnover Ratio

Liquidity Analysis

Solvency Analysis

FINANCIAL ANALYSIS

Turnover Ratio

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2012

Dec-31-2013

020406080

100120140

Inventory Conversion Period

Riverstone Kossan Supermax

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2012

Dec-31-2013

0

20

40

60

80

100

Receivable Conversion Period

Riverstone Kossan Supermax

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2012

Dec-31-2013

0102030405060

Payable Conversion Period

Riverstone Kossan Supermax

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2012

Dec-31-2013

0

50

100

150

200

Cash Conversion Cycle

Riverstone Kossan Supermax

Profitability Analysis

Turnover Ratio

Liquidity Analysis

Solvency Analysis

FINANCIAL ANALYSIS

Liquidity Analysis

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2-12

Dec-31-2013

0

1

2

3

4

5

6

Current Ratio

Riverstone Kossan Supermax

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2012

Dec-31-2013

00.5

11.5

22.5

33.5

44.5

5

Quick Ratio

Riverstone Kossan Supermax

Profitability Analysis

Turnover Ratio

Liquidity Analysis

Solvency Analysis

FINANCIAL ANALYSIS

Solvency Analysis

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2-12 Dec-31-2013

0

5

10

15

20

25

30

35

Long-term D/E

Riverstone Kossan Supermax

Dec-31-2009

Dec-31-2-10

Dec-31-2011

Dec-31-2012

Dec-31-2013

0

10

20

30

40

50

60

70

Total D/E

Riverstone Kossan Supermax

Risk Analysis

Riverstone Supermax Kossan

Beta 0.1854 0.2776 0.1232

Average return (%) 0.2225 0.6943 0.3764

Standard deviation 0.0330 0.0669 0.0597

Riverstone is an attractive investment for risk adverse investors.

Risk free rate: 2.46% (Singapore Government 10-year bond yield)

Market Return: 13.56% (By analyzing the MSCI world Index past return)

Return of equity=2.46+0.1854*(13.56-2.46)=4.5179%

No debt

WACC=Return of equity

WACC

VALUATION

Dividend

Discount

Model

P/E Ratio Model

Free Cash Flows

to Firm (FCFF) metho

d

Dividend Discount Model

Why failed?

Growth rate (%)

2009 2010 2011 2012 2013

Total revenue 10.2% 42.3% 23.1% 13.6% 15.5%

Gross profit 31.5% 29.0% 22.6% 23.1% 27.3%

Net income 19.0% 18.2% 14.2% 12.8% 16.2%

DDM is limited to firms that are growing at a stable rate.

P/E Ratio Model

Why failed?

Aug-

12-2

013

Aug-

25-2

013

Sep-

07-2

013

Sep-

20-2

013

Oct-0

3-20

13

Oct-1

6-20

13

Oct-2

9-20

13

Nov-1

1-20

13

Nov-2

4-20

13

Dec-0

7-20

13

Dec-2

0-20

13

Jan-

02-2

014

Jan-

15-2

014

Jan-

28-2

014

Feb-

10-2

014

Feb-

23-2

014

Mar

-08-

2014

Mar

-21-

2014

Apr-0

3-20

14

Apr-1

6-20

14

Apr-2

9-20

14

May

-12-

2014

May

-25-

2014

Jun-

07-2

014

Jun-

20-2

014

Jul-0

3-20

14

Jul-1

6-20

14

Jul-2

9-20

14

Aug-

11-2

014

10

11

12

13

14

15

16

P/E Ratio

P/E ratio model is suitable for mature companies with stable earnings multiple .

4 Assumptions:

Sales to grow for the next 5 years at 23.13% Operating expense/income - Used historical

average of percentages of sales Capital expenditure to grow at 17% p.a. Tax rate of 20% of EBT for the next 5 years

FCFF method

FCFF method

2014 2015 2016 2017 2018

Currency (in millions) MYR MYR MYR MYR MYR

Free cash flow to firm (FCFF) 4.89 25.85 34.99 46.75 61.86

Discount factor (at 4.5179% WACC) 1.0452 1.0924 1.1418 1.1934 1.2473

Present value (PV) of FCFF 4.68 23.66 30.64 39.17 49.60

Total PV of five year FCFF 147.75

Terminal value 3,079.92

PV of terminal value 2,469.27

PV of total FCFF* (in millions MYR) 2,617.02

Total PV on 8 August 2014 (MYR) 2,687,653,401.53

Number of shares 371,226,025.00

Share Price (MYR) 7.24

Share Price (in SGD)** 2.82

CONCLUSION

THANK YOU

Q & A