The team at RHB Group Research has upgraded Riverstone to “neutral” from “sell”, as it sees the glove company’s cleanroom glove average selling prices (ASPs) to remain resilient in the shorter term.
The team has also upped its target price estimate on the counter to 74 cents from 65 cents before. The new target price implies an FY2023 P/E of 16x, which is in line with its pre-pandemic five-year mean.
“Depending on specifications, Riverstone’s cleanroom glove ASPs are quoted at US$105.00 – US$110.00 ($141.24 - $147.96) currently, after passing on the cost savings to its customers,” writes the team.
“The higher-margin cleanroom segment is expected to partly cushion the decline in the healthcare division. That said, we still expect weaker quarters ahead, as the healthcare division still encompasses the majority of production volumes,” it adds.
In its Feb 23 report, the RHB team adds that it sees Riverstone’s expansion to be on track to hitting its target of 1.5 billion pieces for the FY2022. Riverstone seeks to hit a total of 12 billion pieces by the end of the FY2022.
“Beyond the immediate term, the company plans to expand capacity by another 1.5 billion pieces per annum (p.a.) for FY2023-FY2024. It has earmarked RM300 million – RM500 million for expansion for the next three years,” notes the team.
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“Additionally, the company aims to achieve a healthcare:cleanroom product mix of 75:25 (from 80:20 in FY2021), through the conversion of healthcare glove production lines, given the more lucrative returns of the cleanroom segment,” it adds.
On Feb 22, Riverstone reported earnings of RM1.42 billion ($456.1 million) for the FY2021, up 119.1% y-o-y, which came within the RHB team’s estimates.
Following the release of its results, the team has upped its earnings estimates for the FY2022 to FY2023 by 3% - 7%. This is after raising its cleanroom glove ASP estimates on the back of the latest trends. The team says it has also lowered its raw material cost assumptions.
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According to the team, key downside risks to Riverstone are the imposition of a US Customs and Border Patrol ban on its shipments, lower-than-expected ASPs, negative impact of a change in the USD/MYR rate, and higher raw material prices.
DBS Group Research analyst Ling Lee Keng has maintained her “buy” call on Riverstone with a lower target price of 97 cents from $1.20 previously.
According to Ling, the lower target price has factored in lower ASP assumptions and a delay in expansion plans. It is also pegged to a 10x P/E, which is close to Riverstone’s four-year average P/E on blended FY2022 and FY2023 earnings, to “reflect a more normalised environment”.
To her, Riverstone’s FY2021 results also stood broadly in line with her expectations.
The ASP for healthcare gloves has eased further to US$25 – US$30 in the 1QFY2022, down from the US$37 – US$38 per 1,000 pieces in the 4QFY2021, notes Ling.
“Average ASP is expected to stabilise at around the US$25 level,” she writes. “We have lowered our ASP projection for FY2022 to US$24 per 1,000 pieces from US$32. For FY2023, we are projecting a slightly lower ASP of US$22 as more capacity comes online.”
That said, prices are expected to remain firm for the cleanroom segment at slightly above the US$100 level, she adds.
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“Going forward, we expect a higher earnings contribution from the cleanroom segment, which is expected to provide earnings resiliency and sustainable growth for the group,” says Ling.
That said, Ling is buoyant on Riverstone’s prospects that it would be able to increase its market share for cleanroom gloves, taking it from new and existing players, due to its dominant position in the industry.
One of the key risks Ling has identified, is the possibility of a steeper-than-expected reduction in the ASP and, or oversupply of gloves.
As at 12.48pm, shares in Riverstone are trading 2.5 cents lower or 3.03% down at 80 cents, or an FY2022 P/B of 1.4 times and dividend yield of 4.2%, according to RHB’s estimates.
Photo: Bloomberg
