DBS Group Research’s Ling Lee Keng has downgraded her rating on Riverstone to “hold” and lowered her target price to $2.03, down from her previous figure of $2.76.
She believes Riverstone Holdings‘ steep share price increase is ”nearing its end”, especially with more positive news of Covid-19 vaccines coming onstream.
Ling also expects the rising average selling price (ASP) trend to moderate, and said that while the company’s ASP continues to sky-rocket on strong demand and tight supply due to the Covid-19 pandemic, she expects the ASP trend to stabilise in FY2021 and decline in FY2022, though demand is still expected to be firm.
She has estimated an average of 70% y-o-y increase in ASPs in FY2020, flat in FY2021 and decline of 20% to 30% in FY2022. She said the surge in ASP has led to the abnormally high margins and profits, which are not likely to be sustainable in the longer term.
On the other hand, CGS-CIMB analyst Ong Kang Chuen maintained his "buy" rating, albeit with a lower target price of $2.50 compared to the previous figure of $2.78.
While news of Pfizer’s vaccine proving to be more than 90% effective had “overshadowed” Riverstone’s strong 3QFY2020 results, Ong thinks the company’s fundamentals are still “solid”, and expects a strong set of 4QFY2020 results.
“Price hike momentum remains strong in 4QFY2020 amid the worsening pandemic crisis and higher raw material prices. Riverstone targets healthcare/cleanroom segment ASPs to grow by 40%/30% q-o-q respectively, and thinks that prices can continue to trend higher in 1QFY2021F,” he says
As such, he expects gross profit margin (GPM) to further expand in 4QFY2020, as selling prices are rising at a faster pace compared to cost increases.
“With higher sales volume (as new production lines start commissioning) and continued ASP hikes, we expect Riverstone to report a sequentially stronger net profit of RM275 million ($89.9 million) - which is 54% higher q-o-q and 760% higher y-o-y -in 4QFT2020,” he adds.
However, he also pointed out that vaccine news could be a “short-term dampener” on share prices. Ong said the effectiveness of this vaccine has been “stronger than expected”; this could cause near-term share price correction for glove makers.
“We have already conservatively priced in ASP declines from 2Q21 onwards in our estimates (as we anticipate the pandemic to be under better control), but Riverstone remains on track to record profits of RM1.1 billion in FY21F, 88% higher y-o-y,” he says.
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Ong recommends that investors to accumulate on weakness as glove ASPs are likely to stay strong through 2021, coupled with regulatory, manufacturing and logistics hurdles to the widespread availability of Covid-19 vaccines.
The Singapore research team at RHB has also maintained its “buy” rating on the counter and an unchanged target price of $2.73.
To the team, Riverstone’s profit for 3QFY2020 met its expectations, and the company’s expansion plan remains “intact”.
“Riverstone is on track to complete its Phase 6 expansion, with a capacity of 1.5 billion pieces per annum (ppa). Upon completion, Riverstone’s capacity will increase 17% to 10.5 billion ppa. For Phase 6, five out of seven lines have been commissioned and are now operational,” it says.
They noted that the glovemaker’s cleanroom own brand manufacturing (OBM) products received better demand from technology and manufacturing industries such as lenses, batteries, and semiconductors.
As such, the team thinks that at its current share price of $1.96, Riverstone is trading at 9.2x FY2021 P/E. This is below its average forward P/E of 13.4x, which they think is “unjustified”.
They say its long-term earnings growth prospects are bright, given the positive outlook for the cleanroom and healthcare industries.
As at 4.02pm, shares of Riverstone traded at $1.53, with a price to book ratio of 5.81 and dividend yield of 3.2%
