Sri Trang Agro-Industry 2Q20 Results Preview - UOB Kay Hian 2020-07-17: Quarterly Earnings To Have Bottomed For The Year

SRI TRANG AGRO-INDUSTRY PCL (SGX:NC2)

Sri Trang Agro-Industry 2Q20 Results Preview - Quarterly Earnings To Have Bottomed For The Year

Sri Trang Agro-Industry’s 2Q20 earnings are likely to be weaker than we had previously expected owing to the surge in raw material prices in late May-Jun 20 which pressured gross margins in the natural rubber business. However, 2H20 earnings could double h-o-h thanks to improvements in the natural rubber business and a very strong showing from the glove business.
We have revised up our 2020-23 earnings projections by 16-39%.

We expect Sri Trang Agro-Industry (SGX:NC2, STA TB)’s 2Q20 earnings to come in at Bt660m, jumping 144% y-o-y from an especially low base in 2Q19 but reflecting a 23% q-o-q decline on a weaker performance from the natural rubber business.
2Q20 sales are expected to come in flat y-o-y but down 6% q-o-q on the lockdown of cities across the globe.
2Q20’s gross margin should come in at 14%, improving from 10% in 2Q19. However, 2Q20’s gross margin should be flat q-o-q with the glove business’ expectedly wider gross margin in 2Q20 offsetting the lower gross margins from the natural rubber business (as a result of the surge in local raw material prices in late- May-Jun 20 during which rubber supply was low).

Management expects ASPs to increase by 10-15% q-o-q in 2Q20 and ASPs in 3Q20 to increase by a larger degree of > 15% q-o-q. This is because the company is expected to actuate a new pricing policy where it will raise prices aggressively in 3Q20 so that ASPs in the quarter would be about the same as that in 4Q20. This is targeted at accelerating profit growth in 3Q20. It also expects ASPs in 4Q20 to come in flat q-o-q.
Note that in Jul 20, the nitrile glove prices were set at US$60.00/1,000 pieces and latex glove prices were set at US$42.00/1,000 pieces (glove ASP in 1Q20 was at US$19.50/1,000 pieces). Besides this, management believes glove demand will remain strong until 1H21.
In addition, management guided that its glove business’ gross margin would not be lower than that recorded in 1Q20 (19%) even after the COVID-19 outbreak subsides − mainly thanks to economies of scale on capacity expansion.
In the long-term, the company projects glove demand in emerging countries would be solid due to the very low glove consumption per capita vs that of developed countries (US: 150 pieces per capita, Thailand 20 pieces per capita, China 10 pieces per capita and Africa 4 pieces per capita).

Sri Trang Agro-Industry's 2H20 earnings are likely to double from 1H20 earnings. The key drivers would be:
1. an improvement in the natural rubber business as local raw material prices are now declining on seasonally larger market output; and
2. huge earnings contribution from Sri Trang Gloves (STGT) due to an ASP jump.

We have revised up our Sri Trang Agro-Industry's 2020-21 earnings projections as tabulated below. We have a more positive outlook towards the glove and natural rubber businesses for 2H20 and onwards.
Maintain BUY with a higher target price of Bt42.00, based on SOTP-valuation (using the latest FX rate of 100 THB to 4.4059 SGD, we derived target price of 1.85 in SGD term). We have pegged a valuation of 7x 2021F PE (below the stock’s 10 year mean at 13x) to the natural rubber business and 21x 2021F PE (in line with competitor Kossan Rubber Industry’s 5-year mean PE of 21x) to the glove business.
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.

Thunya Sutavepramochanon UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-07-17

SGX Stock Analyst Report BUY MAINTAIN BUY 1.85 UP 1.780