Brokers’ take: DBS downgrades Riverstone to ‘hold’, citing lack of near-term catalysts

DBS Group Research has downgraded Riverstone Holdings : AP4 0% to “hold” from “buy” with a lower target price of S$0.82 compared to S$0.97 previously, as it believes the counter now lacks near-term catalysts amid a more normalised environment.

This comes after the Malaysian glove maker recently paid a special and final dividend per share of 12.2 Singapore cents – a high payout which DBS does not expect a repeat of, given normalising demand and average selling prices (ASPs).

“Demand and ASP for healthcare gloves, which accounts for the bulk of revenue, are normalising from its high amid Covid, though (demand and ASP for) cleanroom (gloves) is still firm,” said analyst Ling Lee Keng in a report on Thursday (May 12). 

The analyst is also expecting margin pressures to arise from higher raw material, labour and utility costs going forward – and therefore projects a lower net margin of 24.3 per cent in FY2022 versus the previous 27 per cent in FY2022.

Labour costs are of particular concern as they account for 15 per cent of Riverstone’s total cost, and also because a minimum wage of RM1,500 was recently implemented in Malaysia from May 1, 2022.

“Though the impact can be mitigated by automation for processes such as glove stripping and packing to increase productivity and reduce manpower, in the near term, we could still expect some pressure on the margin,” said Ling.

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The analyst however remains positive on the stock in the medium- to long-term due to its market leader position in the high-end cleanroom space.

No changes have been made to the brokerage’s earnings forecasts for Riverstone.

Noting that cleanroom gloves currently account for about 20 per cent in terms of production volume in FY2021 and 25 per cent of total revenue and earnings, she believes this segment will contribute about 60 per cent of the group’s total earnings going forward.

“The cleanroom segment is expected to provide earnings resiliency for sustainable growth,” she said.

Shares of Riverstone were up S$0.02 or 2.7 per cent at S$0.755 as at 9.46 am on Friday.