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Valuations attractive at current levels

  • 3Q21 net profit of RM266.4m (-48% qoq, +49% yoy) in line with expectations. Sequentially weaker profit was mainly due to weaker healthcare glove ASPs.
  • Cleanroom demand remains resilient in 4Q21 supporting stable ASPs. Healthcare ASPs still on a downtrend, but volumes seeing signs of recovery.
  • Back-loaded dividend payout for FY21F likely to be key support for share price. 50% DPR assumption points to 19.7% dividend yield. Reiterate Add.

3Q21 net profit in line with expectations

RSTON’s 3Q21 NP of RM266.4m (-48% qoq, +49% yoy) in line with expectations. 9M21 NP made up 87% of our previous FY21F forecast. Weaker sequential topline (-34% qoq) was mainly due to lower ASPs in healthcare segment, as well as c.8% volume decline stemming from: 1) manpower limits at production facility imposed in Malaysia, and 2) shipping delays. Due to lower ASPs, GPM contracted to 54.7% in 3Q21 (-15% pts qoq).

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Cleanroom demand resilient; healthcare seeing signs of recovery

Demand for cleanroom gloves remains robust, riding on growth in tech manufacturing and pharmaceutical industries. We expect cleanroom ASP to remain flattish qoq in 4Q21F. There remains an order backlog for cleanroom segment given production delays
in 3Q21; RSTON has shifted some of its dipping line capacities to increase production in Nov. Meanwhile, healthcare glove ASP remains on a downtrend; we expect 4Q21F ASP to fall 47% qoq due to weaker downstream demand and lower raw material costs.
Nevertheless, RSTON shared that some of its major customers have turned more active in placing orders for Dec deliveries and beyond. We expect a recovery in plant utilisation rate in 1Q22F towards a more normalised level of c.90% (4Q21F: 75%).

Stronger emphasis on ESG

During the results briefing, RSTON also announced that it has set up a new ESG committee, and shared various initiatives to drive further improvements. This includes targets to reduce water (4-5% p.a. between FY20-25) and electricity usage (2% p.a. between FY20-25), as well as steps to ensure employee welfare and talent development. We are also pleased to note that RSTON has also scored highly in Responsible Business Alliance’s (RBA) special audit on foreign workers’ issue, which we think is important
especially when multiple peers have been hit by forced labour allegations by the US. Customs and Border Protection (CBP).

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Maintain Add with lower TP of S$1.20

Maintain Add; we believe the share price weakness has priced in expectations of weaker earnings in FY22/23F. Our FY21-23F EPS are lowered by 5.4-27.6% on the back of lower ASP and volume assumptions (due to new capacity additions delayed to 1Q22F). TP lowered to S$1.20, still based on 17x CY23F P/E (RSTON’s 5-year mean). Valuation is attractive at 11.1x CY23F P/E, backed by net cash position of S$0.39/share (49% of market cap). Downside risks include steeper pricing decline for healthcare gloves.