1Q22: Positive Signs That The Worst Is Over
RSTON released its 1Q22 update, showing sharp yoy falls in revenue and net profit,
largely in line with expectations. Healthcare glove ASPs appear to be reaching a plateau
which could help support earnings as raw material costs start moderating. Cleanroom
gloves, a key driver for future earnings growth, saw 1Q22 ASPs and sales volumes
remaining steady from strong secular demand. Maintain HOLD with a slightly lower
target price of S$0.80.
RESULTS
• Sharp yoy falls as ASPs normalise. For 1Q22, Riverstone Holdings (RSTON) reported
revenue and net profit of RM402.3m (-61.0% yoy, -1.9% qoq) and RM108.7m (-79.2% yoy, –
1.8% qoq) respectively, forming 22.1% and 25.2% of our full-year 2022 forecasts and largely
in line with our expectations. The sharp yoy fall in revenue is largely due to the normalisation
of healthcare gloves ASPs from pandemic highs. Gross profit fell 78.2% yoy as margins
contracted due to shrinking ASPs, forming 24.9% of our full-year forecasts and in line with
expectations. However, 1Q22 gross margins improved qoq to 38.4ppt from 37.7ppt in 4Q21,
driven by a drop in raw material costs for healthcare gloves and robust sales volume from
the higher-margin cleanroom gloves segment.
• Healthcare segment reaching a plateau. On a qoq basis, 1Q22 revenue and net profit only
softened 1.9% and 1.8% respectively. This is largely due to healthcare gloves sales volume
increasing 21% qoq despite ASPs (around US$30/’000pcs in 1Q22) falling in the same
quarter. Furthermore, raw material costs also softened from US$29/’000pcs to
US$24/’000pcs in 1Q22, supporting gross margins. Healthcare gloves formed
80%/58%/40% of RSTON’s 1Q22 overall sales volume/revenue/gross profit respectively.
Moving forward, management has noted that demand, ASPs and raw material costs have
stabilised going into 2Q22.
• Cleanroom gloves steady and resilient. For the cleanroom glove segment, ASPs and
sales volumes were similar as of the preceding quarter, backed by strong global
semiconductor and electronics demand. Current ASPs are at US$100-110/’000pcs, holding
steady as greater demand for higher specifications of customisable cleanroom gloves has
led to RSTON holding ASPs or increasing them slightly. Also, pharmaceutical customers
now contribute 15% of cleanroom gloves revenue, a potential new growth driver that RSTON
is planning to increase market share in. As of 1Q22, RSTON commands roughly 40% of
global market share within its respective product classifications. Management expects
volumes for the cleanroom glove segment to increase slightly moving forward due to resilient
global demand.
STOCK IMPACT
• Phase 7 capacity expansion close to completion; phase 8 about to start. New capacity
of 1.5b pcs from phase 7 expansion is expected to be completed by end-22, expanding total
capacity to 12.0b pcs/year. Management has also guided that plans for phase 8 are about to
start, with an additional 1.5bpcs/year to RSTON’s total capacity by end-23. Current utilisation
rates are at 80% but are expected to increase as Malaysia has reopened its international
borders, allowing workers to return back to Malaysia.
EARNINGS REVISION/RISK
• We lower our 2022-24 net earnings by 2.6%/2.3%/1.3% respectively, after accounting for
higher operating costs caused by higher wages and ongoing inflation.
VALUATION/RECOMMENDATION
• Maintain HOLD with a lower PE-based target price of S$0.80 (S$0.82 previously),
pegged to the same 9.2x 2022F PE. We base our valuation at -1SD of RSTON’s long-term
forward PE.
• RSTON’s supernormal earnings have normalised sharply from the peak in 2021, with
healthcare glove ASPs starting to stem its sharp decline and expected to stabilise at current
levels. Coupled with robust earnings from the cleanroom segment, we now reckon that there
is limited downside to earnings given that most countries are still undergoing Omicron
outbreaks and facing the emergence of new Omicron sub-variants. However, trading slightly
below -1SD of its long-term forward PE, we opine that there are no strong catalysts to justify
RSTON trading at higher valuations.
SHARE PRICE CATALYST
• Emergence of a deadly COVID-19 variant.
• Better-than-expected ASP hike and operating leverage.