Broker's take: RHB downgrades Riverstone to 'sell' on risks to future earnings

RHB has downgraded its call on Riverstone Holdings AP4 : AP4 0%from "neutral" to "sell", with a lower price target of S$0.65, compared to S$0.95 previously.

In a report on Thursday (Nov 11), RHB noted that the glove producer's plants are currently operating below optimal levels - at a 75 per cent utilisation rate - as customers are minimising purchases to avoid high-cost inventories.

Despite an increase in orders for next month, the brokerage believes inventory replenishment will be marginal until a price equilibrium is achieved. This could potentially lead to further delays in Riverstone's capacity expansion and risks to future earnings if utilisation rates continue to be sub-optimal, said RHB.

Noting that the average selling price (ASP) of Riverstone's healthcare gloves now range from US$100 to US$120, RHB expects ASP erosion to continue, but at a slower pace, because ASP trends are likely to mirror raw material cost inputs.

After taking into account the windfall tax impact for FY2022, the brokerage has cut its earnings projections for Riverstone for FY2022 and FY2023 by 15 per cent and 19 per cent respectively. Assumptions about ASP and sales volume have also been revised and lowered.

The resultant target price revision, down 18 per cent from the previous target, reflects a valuation pegged at 14 times FY2023 price to equity (P/E), in line with Riverstone's pre-pandemic 10-year mean.

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The target price revision also considers Riverstone's environmental, social and governance (ESG) score, which has been reduced from 2.9 to 2.78.

RHB noted: "The market has yet to fully price in the risk of sub-optimal utilisation rates, and we think margins are not likely to improve to levels comparable to that prior to Covid-19."

DBS has however maintained "buy" on Riverstone, as it expects a bumper final dividend of 39 Malaysian sen to be declared in FY2021. This implies an attractive 16 per cent yield, and will be paid on the back of super normal profits, wrote analyst Ling Lee Keng in a report on Wednesday (Nov 10).

The brokerage has a lower target price of S$1.20, compared to S$1.28 previously, after rolling forward its valuations on blended FY2022 and FY2023 earnings projections to reflect a more normalised environment, although the price target remains pegged at its 4-year P/E of 10 times.

Like RHB, DBS expects Riverstone to perform well in the long run because of its exposure to the cleanroom glove segment. This is a key differentiating factor compared to its peers, said both brokerages.

"We remain positive that Riverstone would be able to increase its market share from new and existing players for cleanroom gloves, given its dominant position in the industry," said Ling.

As at 3.52pm on Thursday (Nov 11), shares of Riverstone were trading S$0.015 or 1.9 per cent lower at S$0.775.

READ MORE: 

• Riverstone Holdings reports 49 per cent rise in net profit for Q3FY21

• Riverstone, Wilton Resources substantial shareholders pare stakes