SRI TRANG AGRO-INDUSTRY PCL (SGX:NC2)
Sri Trang Agro-Industry - 2Q20 Earnings Outlook Remains Positive
- We have a better view of Sri-Trang Agro Industry's 2Q20 earnings, which is expected to be another solid quarter of earnings on the back of high ASP of both natural rubber and gloves.
- We raise our 2020 earnings projection by 88% as the glove business performed better than our expectation in 1Q20, and its outlook is very promising.
- Maintain BUY on Sri-Trang Agro Industry. Target price: Bt39.90.
Sri-Trang Agro-Industry's 2Q20 earnings outlook remains positive.
- Sri-Trang Agro Industry (SGX:NC2)'s management revealed that ASP of natural rubber in 2Q20 would drop only slightly q-o-q. However, this will still be much higher than SICOM market price which has fallen sharply since Mar 20 due to the COVID-19 outbreak and low crude oil price. This is because of forward selling strategy.
- In addition, Sri-Trang Agro Industry’s glove business would continue to be healthy in 2Q20 thanks to ASP price adjustment that would see an increase of 5% every month. Moreover, Sri-Trang Agro Industry still has strong negotiation power in buying raw material from local farmers as other large competitors went bankrupt last year. Thus, we have a better view on 2Q20 earnings outlook and think that 2Q20 earnings could beat 1Q20’s earnings of Bt854m.
Very promising outlook for glove business in next two years.
- Management revealed that glove booking orders now have been extended to the early of next year, as the COVID- 19 pandemic has instilled strong global awareness of the need to protect one’s self against virus infection. Management believes this strong demand would abate much even after the pandemic subsides, as people’s behavioural patterns have already changed to becoming more cautious and wary of virus infection.
- Furthermore, the barrier to entry in glove business is quite high. A total of three years is required to set up a glove business – one year for plant building and 1-2 years to receive glove quality certification in overseas countries. Note that Sri-Trang Agro Industry is now the third largest glove producer in the world with its existing capacity of 33b pieces a year. STA targets to raise its glove capacity to 100b pieces a year in 2032.
2020 earnings would be very high.
- We believe that 2H20 earnings would not be much softer than 1H20 as the weaker performance in natural rubber business brought about by the COVID-19 outbreak would be partly offset by a solid performance from its glove business.
Maintain BUY on Sri-Trang Agro-Industry
- We revise up our 2020 earnings projection as Sri-Trang Agro Industry's 1Q20 net profit of Bt379m from its glove business was higher than our expectation. Moreover, 2Q20 earnings are expected to beat 1Q20’s earnings of Bt854m.
- Maintain BUY with a higher target price of Bt39.90, based on SOTP-valuation. Using the latest FX rate of 100THB to 4.4555SGD, we derive target price of 1.78 in SGD term.
- See Sri Trang Agro Share Price; Sri Trang Agro Target Price; Sri Trang Agro Analyst Reports; Sri Trang Agro Dividend History; Sri Trang Agro Announcements; Sri Trang Agro Latest News.
- We use 10x 2020F PE (which is slightly below Sri-Trang Agro Industry’s 10-year mean at 13x) for its natural rubber business. We use 23x 2020F PE (which is slightly higher than its competitor, Kossan Rubber Industry’s 5-year mean PE of 21x) for its glove business.
- Share price catalyst: Rising global glove demand.
Thunya Sutavepramochanon
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-05-20
SGX Stock
Analyst Report
1.78
UP
0.852
