For the three months to March 31, Riverstone reported a 1% y-o-y increase in revenue but earnings dropped by 19% y-o-y no thanks to higher material costs and an unfavourable product sales mix which weighed down margins as well.
The company plans to pay an interim dividend of 3 sen, which represents a payout ratio of 79% and an annualised yield of 4% based on May 7's closing price of 94 cents.
RHB is optimistic that Riverstone, whose gloves are used in clean rooms among others, will benefit from the recovery in global semiconductor sales in 2025, seen to grow by 11.2%.
The pick-up in the semiconductor industry, according to RHB, is largely underpinned by demand for logic integrated circuits or ICs and a strong recovery in memory space, thanks to the boom in artificial intelligence or AI-related servers and equipment.
See also: Could Google lose search dominance in the AI age?
Ahead of possible implementation of tariffs by the US, other Malaysian glove makers are seeing front-loading orders.
However, this is less so for Riverstone given how it is more focused on the cleanroom users which fetches better margins, says RHB.
Nonetheless, having taken into account unfavourable forex and lower average selling prices, RHB has reduced its FY2025 and FY2026 earnings by 13% each. Having applied the same 20x FY2025 earnings valuation, the new target price is $1.08, from $1.18.
See also: KGI Securities starts coverage on ISOTeam with 'outperform' call and 10 cents target price
"We continue to like the group for its unique exposure in the cleanroom segment, above-industry margins profile, and consistent dividend payouts," says RHB.
Analysts from UOB Kay Hian and CGS International are not as optimistic, as both houses downgraded their respective calls on the stock.
William Tng of CGS foresees greater competition for market share, which will exert pressure on margins as glove makers try and absorb higher material costs and bear with unfavourable currency movements.
Tng estimates that Riverstone's FY2025 earnings might drop by 25% y-o-y before recovering 9% in the coming FY2026.
Tng is cheered by how Riverstone's dividend is set to remain relatively generous but has nonetheless downgraded his call from "add" to "hold", with a new target price of 84 cents from $1.10.
For him, upside risks would include stronger-than-expected recovery in demand and better sales of cleanroom gloves on the back of a recovery in the electronics sector.
On the other hand, downside risks include weaker-than-expected gross margins due to the change in product mix and a stronger RM against the US$, as well as more intense competition in the Asia and Europe markets as higher US tariffs would likely result in a diversion of gloves output by Chinese suppliers to these markets.
For more stories about where money flows, click here for Capital Section
In their May 9 note, Heidi Mo and John Cheong of UOB Kay Hian point out that Riverstone's production increase was hampered by a shortage of gas.
As a result, planned production using new lines will only start in July.
Similar to Tng, they expect Riverstone to maintain its dividend payout ratio thanks to the company's strong cash balance of RM760 million, equivalent to 18% of its market cap.
Nonetheless, they have also reduced their earnings projection by 11% for the current FY2025 and by 14% for FY2027.
"While volume growth is expected to continue, it will likely be more subdued due to ongoing gas supply constraints delaying the ramp-up of new production lines," the analysts state.
In addition, they have reduced their earnings multiple from 20x to 18x given near-term headwinds, thereby deriving their new target price of 82 cents, from $1.16.
"Prolonged uncertainty surrounding global trade and monetary policy is weighing on the US dollar and in turn, impacting Riverstone’s earnings, while elevated raw material costs are expected to continue dampening margins," state Mo and Cheong.
Riverstone Holdings shares dropped by 8.56% on May 8 to change hands at 86 cents as at 4.47 pm.
