RIVERSTONE: After 1H challenges, Optimism Evident for 2H as Cleanroom Gloves Recover

THE CONTEXT • Riverstone Holdings' stock is down 20% year-to-date (from 89 cents to 71. 5 cents), weighed down by the weak USD vis-a-vis RM, the reporting currency.  The US represents 70% of Riverstone's healthcare glove sales with 100% denominated in USD. Riverstone hedges 50–70% of its USD exposure. Cleanroom gloves recover Q: Wiith six new production lines operational in 2H, what is the outlook for cleanroom gloves? TS Wong, CEO:  When we look at the third quarter, there's an improvement compared to 1H and seems like demand for cleanroom gloves will be better. When we communicate with customers, they're very optimistic because of AI, they need a lot of storage and servers. We can see there's an increase in demand for July, August and September. Hopefully the trend will continue. (Excerpts from 1H2025 earnings call) In addition, price competition from Chinese manufacturers targeting the European market has intensified, pressuring Riverstone to lower its prices too.  • It's another category of gloves, for use in cleanrooms of tech manufacturing, that enabled Riverstone to get through the tough 1H2025 with profitability.  High-end cleanroom gloves face less competition due to stringent specifications, functional testing, and long-term customer relationships. • Riverstone's 1H 2025 net profit was MYR 101.8 million, down 29.6% YoY, with a net profit margin of 20.48%.  • Cleanroom gloves typically contribute 70% of the gross profit despite lower sales volume (20% of total volume). • The chart below shows Riverstone's  profit trajectory in the past 8 quarters.  • Read what CGS says ....

Excerpts from CGS report
Analysts: William Tng & Tan Jie Hui

Riverstone has a resilient business producing high-margin cleanroom gloves as well as customised gloves for the healthcare sector.

Riverstone Holdings’ (RSTON) 1H25 revenue formed 47%/42% of our/Bloomberg consensus' FY25F forecasts, below expectations. Net profit was also below expectations at 43%/35% of our/Bloomberg consensus' FY25F forecasts.

1H25 revenue was flat at RM497.1m, supported by higher contribution from the generic healthcare segment, offset by a slight yoy decline in cleanroom volumes and foreign exchange translation losses.

1H25 gross profit declined 24.8% yoy to RM147.9m as margin was impacted by:
1) depreciation of the US dollar against the Malaysian ringgit,
2) higher volume of lower margin generic healthcare gloves, and
3) higher depreciation costs.

In its 1H25 results press release, management guided that market conditions are improving heading into 2H25F. Although competition in the healthcare glove segment is intensifying, demand for generic healthcare gloves remains stable. 

In the cleanroom glove segment, management expects stronger contribution in 2H25F underpinned by increasing demand from data centres and AI-related industries. RSTON’s strategy continues to focus on higher margin cleanroom gloves and customised healthcare gloves.

Despite the 1H25 net profit miss, we leave our FY25F net profit forecast unchanged as we assume a catch-up with a stronger 2H25F performance.

We upgrade our call to Add from Hold as:
a) we roll over to FY27F,
b) current net profit decline concerns are priced in,
c) net profit likely to recover hoh, and
d) 7.0-8.3% dividend yields limits share price downside.

We now value RSTON at 15.6x FY27F EPS forecast, +0.5 s.d. above its 10-yr (FY16-25) average P/E multiple.

We lengthen the valuation time frame to better appreciate how the market has valued RSTON in the past over different business cycles. 

Full report here.