$Riverstone (AP4.SG)$ RHB have upgraded Riverstone to Buy fr...

RHB have upgraded Riverstone to Buy from Neutral, with new DCF-derived 0.93 TP from 0.74, 27% upside and c.3% yield.

They believe it is in a sweet spot to capitalise on the recovery of global semiconductor sales. On healthcare gloves, management intends to focus on high specialty products following the completion of revamping its generic production line to a customised production line. They like the company for its unique exposure to the cleanroom segment, above-industry margin profile, and consistent dividend payout.

Global semiconductor industry sales chalked up USD47.6bn during the month of January, an increase of 15% YoY according to The Semiconductor Industry Association (SIA). The outlook for 2024 is expected to be poised for a recovery (estimated 2024 growth of 13%) following a 9% contraction in 2023. As such, Riverstone is expecting its cleanroom gloves ASP to hold up steadily at USD90 /1,000 pieces driven by solid customer demand from various technology industries such as hard disk drive, sensor, chip manufacturing, among others.

As inventory de-stocking approaches its tail end, we expect the demand supply dynamics to reach equilibrium by 2H24. Positively, customers' orders for healthcare gloves have been picking up (for April and May) mainly driven by the increased demand for specialty healthcare gloves (ie de-contamination use). More so, the company successfully raised its healthcare gloves ASP to USD28.5 from USD26.5 in 4Q23. Moving forward, it intends to prioritise its specialty products after decommissioning 13 old and inefficient lines in 4Q22.

Riverstone is expected to replenish its production capacity by 1bn (primarily for cleanroom gloves) by end-2024. Moving forward, we expect the company to chart a 23% core profit growth in 2024, underpinned by the robust recovery of global semiconductor sales and better demand visibility for healthcare gloves by 2H24. Positively, Riverstone is the only Malaysian glove maker that is still posting double-digit core profit margin while continuing its consistent dividend payout.

They raise their FY24F-25F earnings by 14-24% to account for improving sales volume with a better product mix, ie customised healthcare gloves and cleanroom gloves which should sustain its ASP moving forward. Their DCF derived-TP implies 18x FY24F P/E which is +0.7SD from its pre-COVID-19 5- year historical mean of 14.8x. Their TP incorporates a 0% ESG premium after they raised its ESG to 3.1 from 2.8 predicated on the company's proactive measures to switch towards sustainable energy (resulting in the increasing trend of renewable energy intensity consumption YoY).