Lacking near-term catalysts
- 1Q22 in line; weaker margins y-o-y due to normalisation of demand and ASPs
- Margin pressure expected, going forward, owing to rising raw materials, labour, utilities costs
- Remain positive in the medium to long term, as cleanroom segment to provide earnings resiliency for sustainable growth
- But given lack of near-term catalysts, we cut to HOLD with a lower TP of S$0.82
Investment Thesis:
Downgrade to HOLD due to lack of near-term catalysts and margin pressures, suspending coverage due to reallocation of internal resources. With a lack of catalysts in the near term after the recent payment of the 38 sen (c.12.2Scts) special and final DPS , coupled with margin pressure, we downgrade the stock to HOLD. We do not expect a repeat of the high dividend payment, given a normalised demand and average selling price (ASP) environment. Demand and ASP for healthcare gloves (HC), which accounts for the bulk of revenue, are normalising from its high amid COVID, though cleanroom (CR) is still firm. Furthermore, we expect to see margin pressure from rising raw material, labour, and utility costs and have penciled in a lower net margin of 24.3% in FY22F, vs. 27% in 1Q22.
Remain positive in the medium to long term. We remain positive about Riverstone in the long term. The group stands out among its peers as the market leader in the high-end cleanroom space. CR gloves currently account for c.20% in terms of production volume in FY21 and about 25% out of total revenue and earnings. Going forward, we expect the CR segment to contribute about 60% to total earnings. The CR segment is expected to provide earnings resiliency for sustainable growth.
Valuation:
Cut to HOLD with a lower TP of S$0.82. Our TP is reduced to S$0.82 (previously S$0.97), pegged to its four-year average PE of 8.5x (previously 10x) on blended FY22F and FY23F earnings to reflect a more normalised environment.
Where we differ:
We are cautious about margins, given the inflationary pressure on raw materials, energy costs, and also higher labour costs.
Key Risks to Our View:
A steeper-than-expected reduction in the ASP and/or oversupply of gloves.