CGS International analyst Ong Khang Chuen has upgraded his call on Riverstone Holdings AP4 to &ldquo add&rdquo from &ldquo hold&rdquo previously following the company&rsquo s business update for the 3QFY2024 ended Sept 30. He has also lifted his target price estimate to $1.10 from 95 cents previously.

 

Ong&rsquo s upgrade comes amid &ldquo dissipating concerns&rdquo over foreign currency (forex) pressures after President-elect Donald Trump&rsquo s win, as well as better prospects in FY2025 from the trade diversion of medical gloves stemming from the increase in US import tariffs on Chinese gloves. The US government has announced a 50% import tariff on China-made medical gloves by January 2025, with aims to increase this to 100% in January 2026.

 

In the 3QFY2024, Riverstone announced a net profit of RM27 million ($8.08 million), 22% higher y-o-y and slightly above Ong&rsquo s preview expectations of RM69 million. Riverstone&rsquo s 9MFY2024 net profit formed 77% of CGSI&rsquo s and 74% of Bloomberg&rsquo s consensus estimates.

 

While sharp US dollar (USD)/Malaysian ringgit (RM) currency movements affected gross profit margin (GPM) this quarter, with GPM falling and 0.2 percentage points (ppt) y-o-y, Ong notes that net profit came in flattish q-o-q due to stronger revenue growth of 34% y-o-y.

 

Riverstone still expects a planned new capacity of six cleanroom lines and three healthcare lines to be commissioned by 4QFY2024, with three more healthcare lines in 1QFY2025. 

 

As such, Ong notes that Riverstone has seen an increase in volume commitments from US-based customers who are shifting their purchases to Malaysian glovemakers.

&ldquo We expect Riverstone&rsquo s sales volume of generic healthcare gloves to further ramp up in the next four quarters and believe margins of this product category will improve due to enhanced economies of scale and Riverstone&rsquo s stronger pricing power amid industry developments,&rdquo Ong adds.

 

Ong anticipates that Riverstone&rsquo s healthcare segment will record 31% y-o-y sales volume growth in FY2025.

 

However, Ong notes that segment GP should grow at a slower rate of 12% y-o-y due to a shift in sales mix toward lower-margin products.

 

Following this, Ong has lifted his FY2025 to FY2026 earnings per share (EPS) forecasts by 5.4%-9.9% on the back of higher healthcare segment sales and GPM assumptions.

 

Given Riverstone&rsquo s strong balance sheet, Ong expects its FY2024 dividend payout ratio to remain at 150%, with a special dividend declared with its 4QFY2024 results announcement.