• Keep BUY with higher DCF-derived SGD1.05 TP from SGD0.93, 18% upside and 5% yield. Riverstone should be poised to benefit from the global semiconductor sales recovery and improving market dynamics within the healthcare gloves industry. We continue to like RSTON for its unique exposure in the cleanroom segment, above-industry margins profile, and consistent dividend payout. Our TP incorporates a 0% ESG premium/discount, as its 3.1 ESG score is on par with the country median.

• Key operating metrics. To recap, RSTON saw ASPs across its businesses post stabilised QoQ trends in 1Q24, with cleanroom and healthcare ASPs recorded at USD90 and USD28/1,000 pieces, ie largely unchanged vs 4Q23’s numbers. Despite its healthcare generic products selling within the USD19- 19.50 range – largely in line with the Big 4’s ASPs – the group has been able to differentiate itself from its competitors via its healthcare specialty products, which command higher ASPs. Sales volumes for cleanroom products were said to improve 5% QoQ in 1Q24 (4Q23: +5% QoQ) and management is expecting the growth momentum for such products to continue in the coming quarters – underpinned by the semiconductor industry’s recovery.

• Margins. During 1Q23, the cleanroom and healthcare segments posted gross margins of 55% and 24.5% vs 4Q23’s 60% and 20.5%. Margins contraction at the cleanroom unit could be due to minor pricing competition from lower- grade products. This was offset against an improved margins performance from the healthcare segment as a result of a better product mix. We expect RSTON’s margins to improve in 2Q24 on the back of an improving cost pass- through mechanism and a stabilised cost outlook.

• Outlook. Moving forward, management intends to: i) Expand the specialty healthcare gloves segment (giving less focus towards the generic segment, given less-attractive margins) and ii) place greater emphasis on growing the Class 100 cleanroom gloves business (there is price competition in lower- grade cleanroom gloves but RSTON still enjoys pricing power here).

• Earnings adjustment. After the results briefing, we raise our FY24F-25F earnings by 12% and 11%, taking into account of the better-than-expected sales volume. We also raise our dividend payout assumption to 80% (aligning with management’s guidance) from 50% with an indicative FY24F yield of 5% based on last Friday’s closing price. Our new DCF-derived-TP is now SGD1.05, which implies an unchanged 18x FY24F P/E, ie 0.7SD above its pre- COVID-19 5-year historical mean of 14.8x.

• Key risks: Lower-than-expected sales volume, weaker-than-expected USD against the MYR, and higher-than-expected raw material prices.

Source: RHB Research - 13 May 2024