The Singapore research team at RHB Group Research has downgraded Riverstone to ‘neutral’ from ‘buy’ with a lower discounted cash flow (DCF)-derived target price of $1.30 from $1.85.
The lower target price came about due to lower earnings estimates and higher long-term ESG-related costs from the team’s DCF methodology.
Further to that, the team sees several earnings downsides on the counter.
See also: Riverstone to continue benefitting from strong glove demand: analysts
For instance, the extension of Phase 1 of Malaysia’s National Recovery Plan (NRP1) may lead to a negative impact on Riverstone’s earnings in the near-term due to their manufacturing plant in Taiping, Perak, which has to comply with the NRP1.
Given the lower production volumes, estimated at 20-30% below the full potential during NRP1, the analysts lowered their FY2021F earnings due to a lower utilisation rate assumption.
The analysts at RHB “believe that long-term gloves consumption growth remains solid due to higher hygiene awareness globally. However [they] think average sale prices (ASPs) peaked in 1QFY2021 due to rising competition from new gloves supply in the market.”
To this end, they have lowered their FY2021 earnings estimates by 8% to RM1.37 billion ($443.3 million) due to the assumed “lower utilisation rate” on the back of the extended NRP1, which was longer than what the analysts expected.
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However, they have kept their earnings estimates for the FY2022F to FY2023 unchanged as they expect Phase 1 to be over eventually.
The analysts note that possible downsides and upsides to their target price include glove ASPs after Covid-19 ends, sales volumes and raw material prices.
As at 3.52pm, shares in Riverstone are trading at 4 cents lower or 3.15% down at $1.23, or 2.8% P/B, according to RHB estimates.
