Analysts from CGS-CIMB Research and RHB Group Research have maintained their “buy” and “add” calls on Riverstone Holdings, but with lower target prices of $2.30 and $1.85 respectively.

For CGS-CIMB’s Ong Kang Chuen, the lower target price was due to the group’s elevated average selling prices (ASPs) not being sustainable in the long run despite seeing “strong earnings prospects” for Riverstone in FY2021.

Ong noted that despite some shipment delays, Riverstone’s 4QFY2020 net profit of RM$331 million ($108.7 million) was 85% higher q-o-q and a 932% surge y-o-y due to stronger-than-expected margin expansion, led by stronger ASPs. FY2020 net profit also came in at RM$647 million, 396% above FY2019’s figure. 

With the declaration of a special dividend, Riverstone’s FY2020 dividend payout ratio is raised to 50%, compared to FY2019’s 42%. Total FY2020 distribution per share (DPS) amounted to 22 sen per share, implying a 5.3% dividend yield. 

Ong said he expects the price hike momentum to continue, amid glove shortages and higher raw material prices. 

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Riverstone targets healthcare and cleanroom glove ASPs to grow respectively by 40% and 30% qoq to US$95 ($126.50) and US$100 per carton in 1QFY2021. “We expect gross profit margin (GPM) to further expand in 1QFY2021, as the selling price uptrend continues to outpace raw material cost increases.” he added.

SEE:Riverstone Holdings' earnings surges by 396.3% in FY2020; declares a total of 22 sens in dividends for the year

Furthermore, management notes that inventory levels across the supply chain are likely to remain low, with some distributors requesting for air freight recently to meet glove demand. 

Ong highlighted that Riverstone continues to focus on maintaining capacity allocation to long-standing customers; its FY2021 capacity, including the new addition of 1.5 billion pieces per annum has been fully taken up.

Moving forward, Ong said Riverstone plans to raise its volume mix from its cleanroom segment to 20% in FY2021, from FY2020’s figure of 15%. 

“We expect demand for cleanroom gloves to be robust in FY21, riding on growth in the tech manufacturing and pharmaceutical industries; Riverstone has also been able to secure customer wins as key competitors in this space were unable to cope with the strong demand.”

He noted the cleanroom segment typically contributes higher ASPs and gross profit margin (GPMs), and the customer relationship is usually more long term as Riverstone deals directly

with the end-customers. 

Ong is positive about such moves, saying “it could lift the sustainable earnings profile of the company.”

DBS Group Research’s Ling Lee Keng gave the stock a “buy” rating and target price of $1.85, and shared the same views as CGS-CIMB, highlighting that ASPs) for FY2021 is still expected to be strong “but should see a gradual decline in FY2022”, adding order visibility is about a year.

She also adjusted her FY2021/FY2022 earnings by 2% and 7% respectively to account for for slightly higher proportion of cleanroom gloves and higher ASP.

Ling also acknowledged that DBS’s target price is “lower than consensus” as they have pegged it to blended FY2021/FY2022 earnings to capture the post Covid-19 impact.

“Our FY2021 and FY2022 earnings are also below consensus as we adopt more conservative assumptions,” she added. 

Moving forward, Ling noted that Riverstone has two further expansion phases in the near-term which will add up to 1.5 billion pieces of gloves each year. This will raise total capacity to up to 15 billion pieces of gloves per annum by end-FY2023. 

Separately, RHB’s Singapore Research Team gave a $1.85 target price, down from $2.73 as they increased the risk premium in its discounted cash flow (DCF) methodology. “We expect share price volatility, as we are approaching peak ASPs in FY2021. Additionally, we have rolled over our DCF to start from FY2022.”

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However, they said that despite the reduction in target price, Riverstone is still “undervalued”. 

The team noted that at the current share price of $1.37, share prices have declined 45% from their peak in Jul 2020. Riverstone is trading at 6.4 times FY2021 P/E, which is unprecedentedly low.

Furthermore, the RHB team highlighted Riverstone’s purchase of industrial land at Bukit Beruntung, Selangor for about RM$5 million. At 1.67 acres, the land valuation works out to RM69 psf. 

“We gather that the acquisition was done to expand its cleanroom gloves manufacturing capacity. We are positive on this deal, since capacity expansion bodes well for future earnings.” they write. 

DBS’s Ling is also positive on the acquisition and said “the new lines coming onboard will allow the group to capture this burgeoning market to drive growth in the coming years.”

As at 3.20pm, shares of Riverstone traded at $1.35, with a FY2021 price to book ratio of 3.3 and dividend yield of 7%, according to RHB.