• Maintain BUY and SGD0.93 TP (DCF), 21% upside and 3.4% FY24F yield. 1Q24 core earnings grew 56.5% YoY to MYR70.6m, accounting for 26% and 27% of our and Street expectations. We deem the results as above expected, given that Riverstone’s 1H results were seasonally weaker (accounting for 24% of the group’s full-year core earnings in 2019). Moving forward, we continue to like RSTON for its unique exposure in the cleanroom segment, above-industry margins profile, and consistent dividend payouts.

• Results overview. 1Q24 core profit came in above expectations, underpinned by higher sales volume from the cleanroom gloves segment following the recovery of the semiconductor and consumer electronic industries. Gross margin expanded 13.1ppts YoY – likely due to a better product mix and higher ASPs. On a sequential basis, revenue was higher while gross profit grew 7.2% QoQ. Core profit margin contracted by 4.9ppts QoQ to 28.3%, driven by an increase in performance incentives. RSTON declared an interim dividend of MYR0.04, representing a payout ratio of 82%.

• Outlook. According to the Semiconductor Industry Association, global semiconductor industry sales chalked up USD47.6bn during February, which represented a 16% YoY increase. The continuation of strong YoY growth (following 15% growth in January) indicates that the global semiconductor sector is experiencing a secular recovery trend – fuelled by a series of tech companies’ regional expansions, pick-up in sales from China, and the increasing adoption of cleanroom gloves beyond the traditional life science industry. That said, we believe RSTON is strategically positioned to reap the low-hanging fruits of robust demand from the hard disk segment, as well as the consumer electronics recovery, ie smartphone sales, which had been impeded by the high interest rate environment. For its healthcare segment, the group intends to diversify its products offerings towards specialty gloves – so as to yield better margins, given that specialty products typically command higher ASPs than healthcare examination gloves.

• Earnings adjustments. We make no changes to our earnings estimate pending today’s post-results briefing.

• Maintain NEUTRAL. Our DCF-derived TP of SGD0.93 implies 18x FY24F P/E which is 0.7SD above RSTON’s pre-COVID-19 5-year historical mean of 14.8x. Our TP incorporates a 0% ESG premium/discount, as RSTON’s ESG score is on par with the country median.

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

Source: RHB Research - 10 May 2024