Analysts from DBS Group Research, CGS-CIMB Research and RHB Group Research are upbeat on Riverstone Holdings after its 1QFY2021 ended March beat their expectations on the back of strong demand and higher average selling prices (ASPs).
DBS and RHB maintained their ‘buy’ calls with unchanged target prices of $1.86 and $1.85 respectively, while CGS-CIMB maintained its ‘add’ call with a lower target price of $1.80 from $2.30 previously.
The DBS team notes that the continued surge in ASPs, along with robust demand for both healthcare and cleanroom gloves, underpinned the 1022 % y-o-y spike in net profit to RM522.7 million ($168.6 million), despite higher production costs.
But the team notes that q-o-q growth in revenue and net profit for the 1QFY2021 was narrower than the previous quarter, which they believe may indicate that the upward trend in ASPs may plateau soon.
However, DBS expects ASP for cleanroom to be firmer and less volatile than for healthcare, due to tighter supply and less competition for cleanroom gloves, in addition to downward pressure on healthcare glove ASP following the steep increase during the previous quarter and easing raw material prices.
DBS believes demand will remain robust going into 2Q2022, despite vaccines being increasingly rolled out, as healthcare providers continue replenishing supply, while a resurgence in Covid-19 cases and increased hygienic practices also contribute to demand.
To that end, the team has raised FY2021 - FY2022 earnings by 83% and 57% to reflect a more gradual reduction in ASP for healthcare from the current high level, only from 4Q2021 onwards. ASP for CR is projected to remain firm in 2021 and to ease gradually in 2022.
CGS-CIMB’s Ong Khang Chuen agrees that ASPs will likely normalise gradually from 2Q2021 onwards, while Riverstone’s cleanroom segment is expected to continue contributing to earnings. “Prioritisation of the cleanroom segment during the Covid-19 crisis is expected to bear fruit in the coming years – the segment typically contributes higher ASPs and gross profit margins, and the customer relationship is more sticky as Riverstone deals directly with end-customers,” he points out.
Ong continues to like Riverstone for its strong earnings prospect in FT2021 on the back of glove demand for both cleanroom and healthcare sectors. However, given the inflection in ASPs, his valuation has been changed to a discounted cash flow methodology, which he says will better reflect the earnings normalisation in coming years. To that end, his target price is lowered to $1.80.
Meanwhile, the RHB Singapore research team believes that despite Riverstone’s reduction in share price by 44% from its peak in July 2020, the stock remains undervalued. “Riverstone is a value play for its attractive near-term yield of 11%, low 10 times FY2023 P/E, and strong balance sheet, with net cash of RM641 million,” they say.
Shares in Riverstone closed up 3 cents or 2.11% higher at $1.45 on May 17.
