Intensifying industry headwinds
- 2Q22 net profit of RM100m (-81% yoy) in line with expectations. Interim DPS of 10 sen signals RSTON’s intention to return excess cash to shareholders.
- While cleanroom’s outlook remains relatively healthy, healthcare ASPs could see further downside in the near term amid industry oversupply.
- Downgrade to Hold from Add with a lower TP of S$0.80 (17x CY23F P/E).
2Q22: Continued outperformance vs. other glove peers
RSTON’s 2Q22 net profit fell to RM100m (-8% qoq, -81% yoy) from the Covid-highs, but remained relatively resilient compared to larger scale Malaysian-listed peers (Hartalega: RM88m; Kossan: RM49m) given its differentiated focus on higher-margin cleanroom gloves. We deem the set of results as in line with expectations, with 1H22 net profit coming in at 62%/60% of our/Bloomberg consensus’ FY22F. RSTON declared an interim DPS of 10 sen (flat yoy). This translates to a DPR of 71%, higher than its typical 50% DPR, signaling management’s intention to return excess cash to shareholders.
Cleanroom outlook remains relatively healthy…
Cleanroom ASPs are likely to remain resilient at c.US$100 (per 1k pieces), though RSTON expects demand to be slightly dampened in 3Q22F by the ongoing disruptions in China. RSTON remains confident in its strong competitive edge in the high-end cleanroom gloves (Class 10 and Class 100) through longstanding technology and experience and plans to further expand its cleanroom facilities to meet future surges in cleanroom demand.
… but pressure continues to pile up for healthcare segment
While healthcare glove ASPs showed signs of bottoming in May (RSTON managed to raise prices slightly due to higher operating costs), industry ASPs saw a turn for the worse in 3Q22F owing to sluggish demand and rising capacity in the global glove sector, which led to intensifying price competition led by Chinese peers. RSTON continues to work with distributors on customised products that offer higher ASPs and margins, nevertheless ASPs are likely to fall further to US$25 (per 1k pieces) in 3Q22F (2Q22: c.US$29). The weaker glove demand is also likely to lead to lower plant utilisation in 2H22F; hence RSTON’s decision to temporarily delay further capacity expansion.
Downgrade to Hold from Add with lower TP of S$0.80
In view of weaker prospects for the healthcare glove industry, we downgrade RSTON from Add to Hold. We cut our FY22-24F EPS by 5.1-30.9% to account for lower healthcare ASPs and margins. In tandem with our EPS cuts, our TP is lowered to S$0.80, still pegged to 17x CY23F P/E (in line with RSTON’s 5-year historical mean). We believe downside is cushioned by potentially higher dividends. RSTON has a net cash position of RM1.2bn as of end-1H22. Assuming RM350m is earmarked for next 3 years’ expansion, we think up to RM850m cash can be paid out, translating to 18 Scts DPS. Upside risks include higher dividend payout and continued resilience in cleanroom demand; downside risks include further downtrend in healthcare ASPs.
