Emerging stronger
- 3Q23 net profit of RM59m (+26% qoq) was a beat as GPM rose 6% pts qoq as its focus on customised gloves pays off with higher prices and margins.
- RSTON has observed slight demand improvement in the cleanroom segment since 4Q23F and is upbeat on further recovery in FY24F.
- Upgrade to Add with a TP of S$0.75 as we like RSTON’s nimble execution and expect it to emerge stronger from the industry downcycle vs. peers.
3Q23 a beat on stronger GPM
Riverstone Holding’s (RSTON) 3Q23 net profit of RM59m (+26% qoq, -7% yoy) was above expectations, with 9M23 net profit forming 85% of our FY23F. While 3Q23 revenue was flattish qoq, GPM expanded 6% pts qoq, driven by: 1) a stronger product mix, with higher proportion of customised healthcare gloves sold, 2) lower raw material price, and 3) weaker RM against US$. RSTON declared a 5 sen DPS in 3Q23, bringing YTD payout to 10 sen DPS (4.8% dividend yield), which translates into a 97% dividend payout ratio.
Strategy to focus on customised gloves pays off
While selling prices for generic healthcare gloves remained flattish qoq in 3Q23, RSTON was able to lift its segment ASP and GPM via its emphasis on growing its customised glove offerings. Catered to laboratory use or corrosion-resistant applications, such products can command GPM of up to c.30% (compared to <5% for generic gloves). RSTON notes that there is limited competition for this niche market currently, and it was able to capture this opportunity as its dipping lines was designed to cater to more flexible manufacturing originally intended for cleanroom glove production. RSTON is currently reconfiguring one of its plants (previously decommissioned) to cater to production of customised gloves and expects new capacity to come onstream from 2Q24F onwards.
Cleanroom segment hopeful for a better FY24F
While cleanroom glove demand remained weak in 3Q23, RSTON has observed a slight demand improvement in 4Q23F and expects further recovery in FY24F, with stronger demand by existing customers and new customer wins in the pharma industry. RSTON lowered selling prices for its lower-end cleanroom offerings by c.3% in 4Q23F but believes that the negative revenue impact can be more than offset by stronger volumes.
Upgrade to Add
We upgrade RSTON from Hold to Add as we believe that the glove industry is showing early signs of recovery. We think RSTON can emerge stronger from the industry downcycle vs. peers with its nimble execution, as it prioritises higher-margin customised products and its unique cleanroom offerings. Our higher TP of S$0.75 is based on 14.5x CY25F P/E (1 s.d. below RSTON’s 5-year pre-Covid historical mean) as we lift our EPS forecasts and roll over our valuation base year. Re-rating catalysts include higher dividend payout and stronger improvement in glove demand outlook with distributors’ inventory levels normalising. Downside risks include weaker-than-expected cleanroom demand amid a still sluggish semiconductor sector, which could pressure RSTON’s ASPs and margins.
