DBS Group Research analyst Ling Lee Keng has downgraded her recommendation of Riverstone Holdings to “hold” with a lower target price of 82 cents from 97 cents.
This is due to a lack of catalysts in the near term after the recent payment of the 38 sen (12.2 cents) in special and final dividends.
The downgrade is also due to the weaker margins on the back of the normalisation of demand.
That said, Riverstone’s share price has performed well year-to-date (y-t-d), surging to a high of $1.13 in March, surpassing Ling’s previous target price of 97 cents, before the payment of its first and final dividend.
However, the analyst says she does not expect a repeat of the high dividend payment, given a normalised demand and average selling price (ASP) environment.
This is in light of how demand and ASP for healthcare gloves, which accounts for the bulk of revenue, are normalising from its high amid Covid-19, though cleanroom (CR) is still firm.
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In her report dated May 12, Ling also expects to see margin pressure from rising raw material, labour and utility costs and has pencilled in a lower net margin of 24.3% in FY2022 ending December as compared to 27% in 1QFY2022.
Her new target price is pegged to its four-year average P/E of 8.5x (previously 10x) on blended FY2022 and FY2023 earnings to reflect a more normalised environment.
The analyst however remains positive about Riverstone in the long term, as she find that the group stands out among its peers as the market leader in the high-end cleanroom space.
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At this juncture, CR gloves currently account for approximately 20% in terms of production volume in FY2021 and about 25% out of total revenue and earnings.
“Going forward, we expect the CR segment to contribute about 60% to total earnings,” Ling says, “the CR segment is expected to provide earnings resiliency for sustainable growth.”
For 1QFY2022, Riverstone reported a net profit of RM108.7 million down 79.2% y-o-y, which is in line with Ling’s forecasts.
Riverstone’s 1QFY2022 revenue of RM402.3 million was stable on a q-o-q basis, as weaker healthcare ASPs were offset by higher volumes, while cleanroom segment’s ASP and volumes remained firm in 1QFY2022.
Meanwhile, CGS-CIMB Research analyst Ong Khang Chuen has kept an “add” rating on Riverstone with an unchanged target price $1.10.
According to Ong, Riverstone’s 1QFY2022 net profit was slightly above expectations, at 32% and 31% of his own and consensus’ FY2022 estimates.
The analyst also notes how Riverstone’s CR segment remains the group’s key earnings contributor, accounting for 60% of its gross profit in 1QFY2022.
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“Cleanroom glove pricing remains high at US$100 ($139)-US$110 per carton in 2QFY2022, and we expect it to remain sticky with quarterly pricing reviews,” says Ong.
The analyst, however, sees Riverstone’s gross profit margin for its healthcare segment to remain healthy at 22% in the 2QFY2022 as the group continues to work with distributors on customised products that offer higher ASPs and margins. The recent appreciation of the USD against the ringgit, as well as the recent increase in industry operating costs, which have enabled the group to raise prices in May by around 4%, are also mitigating factors.
Ong’s estimates come as ASPs for healthcare gloves look likely to bottom out in the 2QFY2022 as ASPs continue on their normalisation trend to US$25 per carton in April (from the US$30 to US$32 per carton in the 1QFY2022).
Ong has made no changes to his FY2022-FY2024 earnings per share (EPS) forecasts, as he believes Riverstone’s earnings are relatively resilient as compared to Malaysian-listed peers, given its sustained performance in the cleanroom segment.
Some downside risks the analyst considers include stronger-than-expected cost pressures negatively impacting margins.
As at 10.59am, shares in Riverstone are trading at 76 cents at a P/B ratio of 1.69x and dividend yield of 4.8% according to CGS-CIMB’s estimates.
