Citing market leader Top Glove, which reported its earnings recently, costs of raw materials have eased for the industry. Tng, in his Oct 13 note, notes that Riverstone should similarly benefit as well.
However, having factored in a weaker US dollar, Tng is expecting FY2025 earnings to dip by 8.3%. Even so, he is keeping his "add" call as he believes that the decline has already been priced in.
"In our view, 2HFY2025 earnings are on track for better h-o-h performance despite our earnings cuts while its 5.7-7.2% dividend yields limit share price downside.
Tng values the company at 91 cents, which is based on 15.6x FY2027 earnings, a valuation multiple that is +0.5 sd above its average P/E in the past ten years.
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Tng says he has applied the +0.5 sd premium given its earnings exposure to higher margin cleanroom gloves versus its competitors and management’s commitment to return excess cash earned during the Covid-19 pandemic to shareholders.
Re-rating catalysts will include stronger-than-expected glove demand recovery and better sales of cleanroom gloves on the back of a recovery in the electronics sector.
On the other hand, downside risks include weaker-than-expected gross margins due to changes in product mix and a stronger ringgit against the US$. Also, more intense competition in the Asia and Europe markets as higher US tariffs have led to a diversion of gloves output by Chinese suppliers to these markets, will be a negative too.
Riverstone shares changed hands at 82 cents as at 4.47 pm on Oct 14, unchanged for the day but down 23.36% year to date.
