The global recovery of semiconductor sales, along with “improving market dynamics” within the healthcare gloves industry, is keeping RHB Bank Singapore analysts “positive” on nitrile glove producer Riverstone Holdings AP4 ’ 2HFY2024 outlook.
In an Oct 7 note, RHB analysts highlight that semiconductor sales spiked 19% y-o-y in July. The current industry operating dynamics remain in favour of the local gloves manufacturers as customers are more receptive to the average selling price (ASP) increase.
That said, RHB says industry-blended ASP is set to improve further to US$21 - US$22 ($27.40 - $28.71) per 1,000 pieces (pcs) by 4Q2024 as Malaysian glovemakers are in the discussion stage to raise prices to translate the effect of the weakening US dollar to customers.
Meanwhile, Chinese glovemakers’ ASPs now range at US$18-US$19 per 1,000 pcs, up from US$17-US$18 in the previous quarter.
In terms of demand, Malaysia’s gloves export volume surged 66% m-o-m and 105% y-o-y in August, outpacing the growth in July. The latest export volume is even 34% higher compared to the pre-pandemic’s two-year monthly average number, indicating that the recovery momentum of global gloves demand remains healthy, says RHB.
“Meanwhile, prospects in the global semiconductor industry are expected to be driven by the increasing demand for generative artificial intelligence, high-performance computing and rapid advancement of the AI industry,” add RHB analysts.
US-China relations
In addition, RHB believes Riverstone could benefit from potential trade diversion with the latest revision of higher import tariff by the US on China glove-makers.
The Office of the United States Trade Representative (USTR) announced on Sept 13 the final modifications concerning the statutory review of tariff actions on China, entailing a new set tariff rate on medical and surgical gloves, which will be revised to 50% and 100%, effective 2025 and 2026 respectively; up from 25% effective 2026 as proposed in May.
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RHB expects Riverstone to benefit from the potential trade diversion given that more than 55% of its revenue is contributed by the healthcare gloves segment.
Upcoming earnings
In August, Rivertone posted earnings of RM144.7 million ($42.9 million) for 1HFY2024 ended June 30, some 54.6% higher than RM93.6 million in the previous year.
That came on the back of revenue increasing by 7.4% y-o-y to RM496.4 million, primarily fuelled by recovering demand for both cleanroom and healthcare gloves.
Looking ahead, RHB lowers its FY2024-FY2 026 earnings forecast by 3%, 8% and 8% for each respective year. According to the analysts, this “largely reflects” the impact of the weakening US dollar against the Malaysian ringgit.
RHB’s USD/MYR assumptions for FY2024-FY2026 are lowered to 4.50, 4.00 and 4.10. For every 5% change in USD/MYR, the impact to Riverstone’s net earnings is 8% for both FY2025 and FY2026.
“Nevertheless, we believe the impact could be mitigated by the company raising ASP to offset against the weakening US dollar, which in turn should sustain our base case long-term margin outlook. Currently, it is in discussion with customers to raise prices by at least US$1,” says RHB.
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Riverstone’s valuation remains “compelling”, says RHB, as it is trading at 0.2 standard deviations above its pre-pandemic historical mean.
With the earnings adjustment, RHB’s new target price is $1.02, down from $1.04 previously.
As at 10.35am, shares in Riverstone are trading 0.5 cents higher, or 0.55% up, at 91.5 cents.
