Can This Share’s 238% Gain In Price Continue?

Since the start of 2007, the glove maker Riverstone Holdings (SGX: AP4) has gone on a great run which has seen its shares gain 238%. In comparison, the Straits Times Index (SGX: ^STI) has delivered returns of just 10.8% at its current level of 3,309 points.

Given its strong historical performance, it might be natural to ask: Can it continue its run?

That’s certainly not an easy question to answer. But fortunately, certain guidelines from great investors like Peter Lynch could help us in the task. In his book One Up On Wall Street, Lynch shared the check-lists he had used personally while he was still the manager of the Fidelity Magellan Fund in the USA from 1977 till 1990.

The checklists have served him well (when he was manager of Magellan for those 13 years, Lynch had posted a 27-fold increase for every dollar invested in the fund!), so let’s see what they can tell us about Riverstone.

1. The Price-Earnings Ratio: Is it low or high for this particular company and for similar companies in the same industry? (Generally, low PEs are preferred)

Riverstone is a glove maker that specialises in producing nitrile medical and cleanroom gloves (the latter is used by manufacturers of technological products). Its main competitors are Malaysia-listed companies like Top Glove Corporation and Hartalega.

Share Trailing PE ratio
Top Glove 15.8
Hartalega 21.3
Straits Times Index 14.1
Riverstone Holdings 14.2

Source: S&P Capital IQ; SPDR Straits Times Index ETF

From the above, it’s easy to tell how Riverstone has a valuation that’s in-line with that of Singapore’s share market in general. In addition, it’s also trading at a relative discount (on a PE ratio basis) as compared to some of its peers.

2. What is the percentage of institutional ownership? The lower the better

Lynch had used this criterion to gauge the level of interest that institutional investors (i.e. money managers with huge sums of capital at their disposal) have for any particular company. He reckoned that companies that flew under the radar of large investors could often be better bargains if their business fundamentals were strong.

In the case of Riverstone, it appears that there’s a very low level of institutional interest in its shares. As of 10 March 2014, the company had only two substantial shareholders (shareholders who control a stake of 5% or more in the company) in Wong Teek Son and Lee Wai Keong. Wong’s the executive chairman and chief executive of the company while Lee’s the chief operating officer and executive director; collectively, they control 59% of Riverstone.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

If insiders and/or the company itself are buying, it could be a signal that the share is undervalued.

A quick glance at Riverstone’s regulatory filings with stock exchange operator Singapore Exchange shows that the company hasn’t engaged in any buy backs over the past six months.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

Year Earnings per share* Year-on-year % Change
2007 7.38
2008 7.88 6.75%
2009 9.54 21.1%
2010 13.0 36.0%
2011 12.2 (6.06%)
2012 12.2 (0.12%)
2013 16.0 31.6%

*Figures in sens

Source: S&P Capital IQ

Riverstone was listed in November 2006 and has been consistently profitable since then. Although its earnings per share has not increased in each consecutive year, there’s still a very clear upward trend without any wild swings.

5. Does the company have a strong balance sheet?

With total cash on hand of RM109 million (including RM50 million worth of fixed deposits) and no debt, the company has a very strong balance sheet.

6. Does the company have room to grow?

Riverstone’s production capacity has grown really quickly. In 2005, it could produce 601 million gloves annually; by 2013, it could manufacture 3.1 billion gloves. And, all that manufacturing activity took place in the company’s many facilities that currently cover a total of 22 acres.

By the end of the next 2 to 3 years however, that figure would likely balloon yet again. That’s because the first-phase of its factory in Taiping, Malaysia, which covers 30 acres (more than the combined area of all its other factories!), is expected to be operational by the third quarter of 2014.

In light of that, the company would certainly have the capabilities to pump out a much higher number of gloves than what it’s managing to do now. But, would there be the demand for its gloves?

Given Riverstone’s unique economic moat around its cleanroom glove products, and a potential new market in terms of tapping into smartphone and tablet manufacturers (in the first quarter of 2014, the company saw “strong take-up” of its products amongst tablet and smartphone manufacturers), it appears there is an adequate runway for the company to grow into.

Foolish Summary

All told, Riverstone seems to have ticked all the right boxes except for the fact that it hasn’t been buying back its own shares. But, a definite answer to the question asked in the second paragraph of this article still can’t be given despite the usefulness of Lynch’s checklists.

That’s because there are other aspects of the company’s business that have yet to be studied. For instance, how is Riverstone’s cash flow situation? What’s the tenure like for the company’s top management? Have they been honest and capable business people? These questions and more need to be answered before a more definitive conclusion about Riverstone’s market-beating potential can be given.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.