Can This 429% Winner Continue Delivering Riches For Its Shareholders?

Early investors in Riverstone Holdings Limited (SGX: AP4) would likely be very satisfied with their experience thus far.

Since the close of its first-day of trading on 20 November 2006, shares of the firm have gained 429% in price, far outpacing the miserly 21% return that has been generated by Singapore’s market barometer, the Straits Times Index (SGX: ^STI), over the same period.

Can Riverstone Holdings continue delivering riches for investors going forward like it has done so mightily well over the past nine years? This is not an easy question to answer but some clues could perhaps be found from an investing checklist which Peter Lynch had used.

For those unaware, Lynch had cemented himself a place in investing folklore by leading the U.S.-based Fidelity Magellan fund to annualised returns of 29% in the 13 years he was running it from 1977 to 1990. At that rate of return, every $1,000 would have become more than $27,000 in 13 years.

In his best-selling investing book One Up on Wall Street, Lynch had shared details about the checklist that he had used in his own research activities. With that, let’s see what the checklist can tell us about Riverstone Holdings.

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 Holdings is a manufacturer of nitrile gloves that are used in both cleanrooms (facilities that manufacture electronic devices) as well as the healthcare industry. Given its line of business, it has a very similar peer in Singapore’s stock market in glove maker UG Healthcare Corporation Ltd (SGX: 41A).

Here’s how the two companies’ PE ratio stacks up against that of the SDPR STI ETF (SGX: ES3), an exchange-traded fund which tracks the Straits Times Index:

Riverstone Holdings and UG Healthcare's valuation table

Source: S&P Capital IQ

I trust it’s obvious to see that Riverstone Holdings’ current valuation can’t really be considered low.

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

Lynch had included this criterion because he believed that shares which were not noticed by institutional investors (big money managers) could make for better bargains as a result of investor neglect.

In the case of Riverstone Holdings, it’d be tough for any institutional investor to amass a sizeable interest. As of 10 March 2015, Wong Teek Son, who’s the executive chairman and chief executive of the company, has a total stake of 50.75% in the firm. Meanwhile, Lee Wai Keong, who’s the chief operating officer, has an 11.66% interest. Together, both top-level executives control 62.41% of Riverstone Holdings.

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

The act of buying from insiders and/or the company itself may be a signal for investors that a stock’s undervalued.

Unfortunately, there hasn’t been any buy backs from both Riverstone’s insiders and the company itself over the past six months.

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

This is an area where Riverstone Holdings has managed to do well in.

Riverstone Holdings' earnings growth table

Source: S&P Capital IQ

As you can see in the table above, the glove maker has been consistently profitable since its listing. And although its earnings did not grow in each year, there’s still been an unmistakable upward climb.

5. Does the company have a strong balance sheet?

With total cash holdings of RM96.8 million and zero borrowings as of 31 March 2015, it wouldn’t be a stretch at all to label Riverstone Holdings’ current balance sheet as “strong.”

6. Does the company have room to grow?

This is an important criterion for investors to note because a company that’s near a ceiling will find itself having a very tough job to do when it comes to creating long-term value for its shareholders.

With Riversone Holdings, there appears to be a long runway ahead for it to expand its business. In 2014, the glove maker had completed the first phase of its expansion to bring its annual production capacity to 4.2 billion gloves at the end of that year.

The company’s currently on track to finish the second phase of its expansion which will amp up its production volume to 5.2 billion gloves at end-2015.

What’s interesting to note is that Riverstone Holdings has five phases of expansion in all, with each phase adding around 1 billion gloves to the company’s annual production capacity. The company won’t be adding production volume blindly, but will instead assess the opportunities in its market carefully before making any decisions.

And speaking of its market opportunity, here’s what my colleague Chin Hui Leong had written a couple of months ago:

“Riverstone Holdings sees itself as the market leader in the cleanroom glove industry and is targeting the premium end of the higher volume healthcare glove industry.

According to information shared by the company, the global healthcare glove market is estimated to be at 165 billion gloves and is growing by 8% to 10% per annum. To put this in context, Riverstone Holdings’ total manufacturing capacity was 4.2 billion gloves as of end-2014.”

In 2014, Riverstone Holdings’ revenue was split nearly equally in terms of cleanroom as well as healthcare gloves, so Hui Leong’s statistics are useful for looking at the company’s room to grow.

A Fool’s take

All told, Riverstone Holdings has managed to tick some of the right boxes. The company has low institutional ownership; a good track record of consistent as well as rising profitability; a rock-solid balance sheet; and what appears to be significant room for expansion.

That said, investors shouldn’t stop here. Important risks, such as competition, have yet to be considered. For a flavour of what’s in store, Malaysia-listed glove maker Hartalega is one of the world’s largest glove makers and it has an annual production capacity of 14 billion gloves.

Meanwhile, crucial issues like the company’s cashflow situation and the quality of its management team have also yet to be discussed.

Investors would have to weigh the risks and rewards with Riverstone Holdings in order to come up with an intelligent investing decision.

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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.