SRI TRANG AGRO-INDUSTRY PCL (SGX:NC2)
Sri Trang Agro-Industry - Positive Earnings Outlook
- Sri Trang Agro-Industry (STA) is the world’s largest fully integrated natural rubber company. Its downstream business in glove production generates high margins, while its midstream business is the processing of natural rubber - mainly concentrated latex which is the primary raw material used in glove production.
- Sri Trang Agro-Industry aims to have a 20% global market share of rubber gloves which have high gross margin and strong demand in developing countries. We project net profit CAGR of 14% in 2019-22.
- Initiate coverage with BUY and target price of Bt19.80.
Investment Highlights
Financial performance improving in 2018.
- Sri Trang Agro-Industry incurred a huge net loss of Bt1,436m in 2017 due to high raw materials costs. However, it turned around with a net profit of Bt1,925m in 9M18 from a net loss of Bt1,906m in 9M17, thanks to higher gross margin and other income.
- In 9M18, sales dropped 19% y-o-y as ASP declined 26% y-o-y in line with global rubber prices, but sales volume increased 4% y-o-y. Gross margin was 10% (9M17: 2%) due to lower raw materials costs. Other income also rose. Normalised net profit, which excludes other income, was Bt950m, turning around from a Bt2,169m loss in 9M17.
- For 2018, we project net profit of Bt2,184m (2017: net loss of Bt1,436m). We think 4Q18 sales would benefit from the 1-month shopping tax-break campaign in Thailand starting 4 Dec 18. Rubber glove and car tyres are entitled to tax deduction under the campaign.
Aiming for a 20% global market share of rubber gloves in the long term.
- Although Sri Trang Agro-Industry has only an 8% share of global glove consumption currently, it sees it having a strong competitive advantage in rubber gloves, especially latex gloves as it is the global largest latex producer with plants in Southeast Asia – a region which has the largest rubber plantation area to produce latex. Thus, the company plans to increase its glove production capacity from 14,000m pieces per year in 2017 to 22,600m pieces in 2019 on the back of growing demand in developing countries and high margins.
- Sri Trang Agro-Industry sees its glove business benefitting from an ageing society and increasing health and hygiene awareness. To become the world’s top three glove producers, Sri Trang Agro-Industry aims for both organic and inorganic capacity expansion. It will raise production capacity to 17,200 pieces by end-18 at its Songkhla and Suratthani factories.
- Also, 90.23%-owned Sri Trang Glove (Thailand) plans to merge in Apr 19 with Thaikong, a natural rubber glove manufacturer in Thailand. Thaikong has a production capacity of 4b pieces per year.
Gross margin expected to be more sustainable in the future.
- Apart from the rise in glove sales which help support gross margin, Sri Trang Agro-Industry is also focusing to improve gross margin for its natural rubber.
- Sri Trang Agro-Industry has reduced its long-term contract sales of natural rubber from 80% of total sales in the past to about 20% now to limit the risk of mismatching between costs and selling prices under its cost-plus strategy. This is because STA needs to keep a large inventory for long-term contract sales but the gross margins for such contracts are slim.
- Meanwhile, short-term contract sales have risen from 20% of total sales in the past to 80% currently. Short-term contract sales have larger gross margins than long-term contract sales. Sri Trang Agro-Industry’s overall gross margins ranged from -4% to 11% in the past four years.
Positive earnings outlook.
- We project normalised net profit CAGR of 14% in 2019-22, driven by steady gross margin and sales expansion.
Valuation
Sri Trang Agro-Industry has been trading at a discount to regional peers.
- Sri Trang Agro-Industry’s 10-year forward PE mean was 12x, much below that of rubber glove producers in the region. Sri Trang Agro-Industry deserves to trade at PE multiples that are near to that of peers.
- Our target price is Bt19.80, pegged at 21x 2019F PE, or +1.0SD to its 10-year mean. This is because:
- its earnings are expected to be more sustainable on steady gross margin; and
- the earnings outlook is promising as STA aims to have a 20% global market share of rubber gloves in the long term.
- (Using the FX rate of 100THB to 4.1746 SGD as of 2018-12-07, we derived target price of 0.827 in SGD term.)
Business Outlook
The world’s leading fully integrated natural rubber company.
- Sri Trang Agro-Industry is the world’s largest fully integrated natural rubber company with a global market share of 10% of natural rubber consumption. It aims to have a 20% global market share of natural rubber consumption in the long term.
- Sri Trang Agro-Industry operates in every sector of the natural rubber industry, from rubber plantation and rubber processing to the manufacturing of medical examination gloves. Sri Trang Agro-Industry’s core operation is natural rubber processing. It produces a complete range of natual rubber products, from technically specified rubber (TSR) and ribbed smoked sheets (RSS) to cencentrated latex. Total production capacity from its 36 facilities in Thailand, Indonesia and Myanmar is 2.86m tons per year.
- 90.23%-owned Sri Trang Gloves (Thailand) is Thailand’s largest and the world’s top-five manufacturer of medical examination gloves with an 8% share of global glove consumption in 2017. STA has some 50,000 rai (8,000ha) of rubber plantations in many provinces in Thailand.
- Sri Trang Agro-Industry is the only Thai rubber company that is dual listed on the Stock Exchange of Thailand and the Singapore Exchange (SGX).
Earnings Outlook
STA sets an aggressive target for 2019 glove sales volume.
- Sri Trang Agro-Industry targets 2019 glove sales volume at 21,000m pieces, up 27% y-o-y, as its expands production capcity from 17,200m pieces in 2018 to 22,600m pieces in 2019.
- The sales volume target for natural rubber is 1.45m tons for 2019, up 6% y-o-y, as Sri Trang Agro-Industry has no plans to expand production capacity for natural rubber. Therefore, we believe the portion of glove sales to total sales will rise from 16% in 2018 to 19% in 2019, which would help support gross margin in 2019 to remain firm.
Promising earnings outlook.
- We forecast net profit of Bt2,184m in 2018, a turnaround from the Bt1,436m loss in 2017, thanks to higher gross margin on lower raw materials costs. We project normalised net profit CAGR of 14% in 2019-20, driven by steady gross margin and sales expansion.
Financials
Expect an acceptable D/E ratio in 2019.
- We forecast Sri Trang Agro-Industry’s capex at Bt4,025m for 2019, (2018F: Bt2,750m) due to capacity expansion. The capex would be financed by bank loans and cash. We project debt/equity ratio to increase from 1.07x as at end-18 to 1.23x in 2019, which is still acceptable.
Comfortable interest cover.
- We estimate interest expense at Bt1,618m in 2019, up 22% y-o-y. Nevertheless, interest coverage ratio in 2019 would remain comfortable at 3.53x.
Refer to the PDF report attached for complete analysis.
Thunya Sutavepramochanon
UOB Kay Hian Research
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https://research.uobkayhian.com/
2018-12-07
SGX Stock
Analyst Report
0.827
SAME
0.827
