Sri Trang Agro-Industry - CGS-CIMB Research 2018-12-17: Positive Newsflow Likely Factored In

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SRI TRANG AGRO-INDUSTRY PCL (SGX:NC2)

Sri Trang Agro-Industry - Positive Newsflow Likely Factored In

• In our view, most positive newsflow has been priced in and Sri Trang Agro-Industry offers limited upside.
• Weak demand and excess supply could pressure natural rubber prices. 
• Reiterate REDUCE and our target price of THB16. We recommend switching to related rubber stocks, i.e. automobile counters.

Limited upside potential

• Sri Trang Agro-Industry's share price jumped 70% between 29 Jun 18 and 7 Dec 18 and we believe there could be limited upside due to
  1. lower sales from low selling natural rubber (NR) prices, especially to China,
  2. low sustained natural rubber margins, and
  3. recent government policies to shore up low prices for domestic natural rubber.
• We believe most positive factors have been priced in. Moreover, demand from China has yet to recover and excess supply continues to put pressure on natural rubber prices.

4Q18F – Natural rubber prices unlikely to recover yet

• We think that natural rubber prices remained weak due to
  1. excess supply as a result of the high number of trees planted in 2010-2012,
  2. lower demand from China due to trade tensions and rising stockpiles in Qinqdao and in the Shanghai Futures Exchange (SHFE) rubber stocks, and
  3. short-term policies by the Thai government (15 Dec 18- 16 Jan 19) to increase domestic natural rubber consumption, which should have a minimal impact on operations as STA exports more than 80% of total output.

Acquisition could increase glove capacity in 2Q19F

• Sri Trang Agro-Industry is expected to manufacture 17.2bn gloves in FY18F and it plans to acquire ThaiKong (TK, unlisted), which will add another c.4bn gloves p.a. If the acquisition goes through, Sri Trang Agro-Industry will have production capacity of c.21.2bn gloves p.a.
• According to company disclosure, FY18F capacity for Kossan Rubber is 26.5bn pieces p.a., Supermax Corp 25.4bn pcs p.a., Top Glove Corp (SGX:BVA) 60.5bn pcs p.a. and Hartalega 32.7bn pcs p.a.

Outlook in 2019F

• We expect natural rubber prices to rise to c. US$1.4/kg in FY19F on the SICOM futures market given
  1. excess supply carried forward from 4Q18 in Thailand,
  2. rising supply from Indonesia after the tapping period ends in Feb 19, and
  3. high stockpiles in China from weak demand in the auto industry.
• We forecast that Sri Trang Agro-Industry will sell 1.4m tonnes of NR in FY19F vs. 1.37m tonnes in FY18F, though selling prices could remain low.

Maintain REDUCE call

• We keep our REDUCE rating and target price of THB16, based on 15.5x CY19F blended P/E (1 s.d. below its historical 5-year average).
• (Using the FX rate of THB100 to SGD4.1953 as of 2018-12-17, we derive the target price of 0.671 in SGD term.)
• Potential de-rating catalysts are
  1. appreciation of Thai baht against US$, which could hurt its export sales, and
  2. high capex to expand its glove business.
• Key upside risks are
  1. stronger-than-expected demand for gloves, and
  2. higher natural rubber prices.

Praphan YUKHUNTHORNTHAM CGS-CIMB Research | https://research.itradecimb.com/ 2018-12-17

SGX Stock Analyst Report REDUCE MAINTAIN REDUCE 0.671 SAME 0.671