CGS-CIMB downgrades Riverstone Holdings to 'hold' on weaker prospects for healthcare glove industry

Felicia Tan
3-min read

CGS-CIMB has also lowered its target price to 80 cents in line with its earnings per share cuts.

CGS-CIMB Research has downgraded Riverstone Holdings to “hold” from “add” previously due to weaker prospects for the healthcare glove industry.

On Aug 11, Riverstone reported earnings of RM208.9 million ($64.4 million) for the 1HFY2022 ended June, 79.9% lower than the earnings of RM1.04 billion in the same period the year before.

In its earnings statement, the company attributed the lower earnings to a normalisation of the market in terms of selling prices and demand for medical gloves, as well as lower sales activities and lower performance incentives.

“The medical glove industry is currently undergoing a normalization trend with demand and average selling prices (ASPs) coming off Covid-19 highs. The extensive investment in production expansion from the investments made by the market and new players during the Covid-19 peaks has resulted in a current oversupply of gloves and inventory,” says Wong Teek Son, executive chairman and CEO of Riverstone.

“The Malaysian Rubber Glove Manufacturers Association has lowered their projected global demand for rubber gloves for 2022 by 12%, confirming the short-term challenges of the industry in Malaysia,” he adds.

Further to his statement, Wong had indicated that the company’s planned expansion to increase capacity to 12.0 billion for end 2022 remains on track.

The board has recommended a dividend of 10 sen for the period.

To CGS-CIMB analyst Ong Khang Chuen, Riverstone’s net profit of RM100 million for the 2QFY2022, which fell by 81% y-o-y, stood in line with his expectations.

The company’s net profit for the 1HFY2022 came in at 62% of his full-year estimates.

The dividend of 10 sen, which translates to a dividend payout ratio of 71%, signals management’s intention to return excess cash to its shareholders, adds Ong.

In his report on Aug 12, Ong sees cleanroom ASPs to remain resilient at US$100,000 ($137,109) per 1,000 pieces, even though Riverstone expects demand to be slightly dampened in the 3QFY2022 by the ongoing disruptions in China.

While ASPs for healthcare gloves showed signs of bottoming in May, industry ASPs fell further in the 3QFY2022 due to “sluggish demand and rising capacity in the global glove sector, which led to intensifying price competition led by Chinese peers”, notes Ong.

To this end, he sees Riverstone’s ASPs as likely to fall further to US$25,000 per 1,000 pieces, down from the US$29,000 in the 2QFY2022.

“The weaker glove demand is also likely to lead to lower plant utilisation in 2HFY2022; hence Riverstone’s decision to temporarily delay further capacity expansion,” the analyst says.

On this, Ong has reduced his earnings per share (EPS) estimates for the FY2022 to FY2024 by 5.1% to 30.9% to account for the lower ASPs and margins.

He has also lowered his target price on the counter to 80 cents from $1.10 in tandem with his EPS cuts. The new target price is still pegged to Riverstone’s calendar year 2023 P/E of 17x.

“We believe downside is cushioned by potentially higher dividends. Riverstone has a net cash position of RM1.2 billion as of end-1HFY2022. Assuming RM350 million is earmarked for next three years’ expansion, we think up to RM850 million cash can be paid out, translating to 18 cents distribution per share,” Ong writes.

As at 9.08am, shares in Riverstone are trading 1.5 cents lower or 1.99% down at 74 cents.

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