UOB Kay Hian analysts Llelleythan Tan and John Cheong have upgraded their call on Riverstone to “buy” as they see that the recovery in the semiconductor industry will benefit the cleanroom glove segment.
“As Riverstone's customers are major manufacturers in the semiconductor and hard disk drive industries, the slowdown in the electronics and semiconductor sectors have led to softer cleanroom glove demand from 2022,” note Tan and Cheong in their Jan 26 report. However, the semiconductor sales market is expected to recover with a 20% growth rate in 2024, up from 11 in 2023.
As such, Riverstone’s management expects demand for cleanroom gloves to recover in 2024.
Cleanroom gloves contribute about 80% to Riverstone’s total earnings. The segment is also likely to see growth thanks to new clients onboarded in the preceding year.
“While management has shared that average selling prices (ASPs) will be lowered to pass on cost savings from raw materials, they have also announced successful client acquisitions from the pharmaceutical sector,” say the analysts.
“The impact of lower ASPs will likely be offset by higher volumes from both Riverstone's semiconductor customers and new clients, pointing to top-line growth for the cleanroom glove segment in 2024,” they add.
On Nov 3, 2023, Riverstone reported a net profit of RM59.3 million ($16.7 million) for the 3QFY2023 ended Sept 30, 2023, 26.5% higher q-o-q although it was still down by 6.6% y-o-y. Riverstone’s 9MFY2023 net profit fell by 43.9% y-o-y to RM152.9 million.
“While the glove industry faced a slowdown from pandemic-induced oversupply and less-than-optimal utilisation in 2023, we note that 3QFY2023 gross profit margin improved 6 percentage points q-o-q and 1.1 percentage points y-o-y,” write Tan and Cheong in their Jan 26 report.
“This significant expansion was driven by a stronger product mix, with more customised healthcare gloves delivered, and lower raw material costs during the period,” they add.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
Riverstone also declared an interim dividend of 5.0 sen, bringing its total dividend for the 9MFY2023 to 10 sen, implying a payout ratio of 97%, showing a “strong vote of confidence”.
“Given that Riverstone has a strong balance sheet with net cash balance of RM951 million as of 9MFY2023, which is equivalent to 18 cents per share (around 30% of market cap), a payout ratio above 100% is highly likely,” say the analysts.
Riverstone is also likely to benefit from higher-margin customised healthcare gloves. The company offers products beyond gloves such as finger cots, cleanroom packaging bags and face masks. Its cleanroom gloves under its own brand, RS, also has a “unique competitive advantage”.
Riverstone, which also sells healthcare gloves, is in the middle of closing its 10-year production lines to build newer lines for customised products. The new production lines are expected to be completed by 2Q2024. The move will allow the company to expand its gross margin substantially as customised gloves fetch a gross profit margin of around 30%, around six times that of generic gloves, say the analysts.
“Moving forward, increased demand for customised healthcare gloves will drive higher margins for Riverstone,” they add.
For FY2023 to FY2025, the analysts estimate Riverstone’s revenue to be at RM964.0 million, RM1.04 billion and RM1.11 billion respectively while patmi estimates are RM212.0 million, RM246.3 million and RM267.4 million respectively. The forecasts were updated after accounting for lower cleanroom glove ASPs and sales volumes estimates.
“ASPs for cleanroom gloves were around US$92 ($123.30) per 1,000 pieces, and we expect it to decline in 2023 - 2025 to US$91 per 1,000 pieces, US$90 per 1,000 pieces and US$90 per 1,000 pieces respectively,” they write.
For more stories about where money flows, click here for Capital Section
Following the upgrade, the analysts have raised their target price estimate to 82 cents from 67 cents. The new target price is pegged to 17.3 times FY2024 P/E or 1 standard deviation (s.d.) above the five-year historical mean.
This is up from -1 s.d. previously to better capture the earnings recovery in the glove industry. The analysts have also rolled their valuations over to FY2024.
“While glove companies continue to face underutilisation, we believe that Riverstone may outperform its peers with its higher-margin customised glove offerings,” they write.
As at 11.03am, shares in Riverstone are trading 4 cents higher or 5.97% up at 71 cents.
