Sri Trang Agro-Industry 3Q20 Results Preview - UOB Kay Hian 2020-10-22: Earnings To Come In Higher Y-o-y & Q-o-q

SRI TRANG AGRO-INDUSTRY PCL (SGX:NC2)

Sri Trang Agro-Industry 3Q20 Results Preview - Earnings To Come In Higher Y-o-y & Q-o-q

We expect Sri Trang Agro Industry to post strong 3Q20 earnings, thanks to the q-o-q jump in glove ASPs. In addition, 4Q20 earnings are likely to come in as this year’s peak as glove ASPs should continue to jump q-o-q.
We raise our Sri Trang Agro Industry's 2020-22 net profit projections by 16-156% as we have a more positive view on glove ASPs while the rubber price uptrend will benefit its natural rubber business.
Maintain BUY with higher target price of Bt48.25.

We project Sri Trang Agro Industry (SGX:NC2)’s 3Q20 net profit at Bt2,184m, jumping 1,517% y-o-y and 100% q-o-q. Key drivers are expected to have been:
1. glove ASP hike of 70% q-o-q and 80% y-o-y to US$35.24/1,000 pieces. We attribute this to the delivery of low-ASP long-term contract sales which had mostly been delivered in 2Q20;
2. uptrend of rubber prices due to the resumption of tyre demand from the reopening of the city in China.
Note that our 3Q20 earnings forecast of Bt2,184m factors in net profit of Bt1,806m from the glove segment and Bt378m from the natural rubber segment. We expect Sri Trang Agro Industry to post a 3Q20 sales increase of 31% y-o-y and 32% q-o-q.
We project a 3Q20 gross margin of 27%, surging from 6.3% in 3Q19 and 16.2% in 2Q20. Cost-to-income ratio should come in at 8%, inching up y-o-y and q-o-q.

Current nitrile glove prices are at US$90-100/1,000 pieces while latex glove prices are at US$50-70/1,000 pieces. The ratio of nitrile gloves to latex gloves in Sri Trang Agro Industry’s sales volume mix is expected to be at 31:69. Thus, glove ASPs in 4Q20 would continue to surge, jumping by more than 50% q-o-q.
The expected sharp rise in 4Q20 glove ASPs should offset the impact from raw material cost increases (latex concentrate) and should underpin gross margin expansion. We expect the company to post a gross margin of 33% in 4Q20. In addition, the uptrend of natural rubber prices in 4Q20 would lend support to the natural rubber business.

Sri Trang Agro Industry revealed that it has not seen any order cancellations from customers. In addition, it expects glove ASPs in 2021 to see a continued increase y-o-y, owing to tremendous global demand. Sri Trang Agro Industry should post outstanding 2021 earnings thanks to:
1. huge earnings contribution from the glove business; and
2. improvements in the earnings trajectory of the natural rubber business with the y-o-y recovery of the global automobile market.

The United States Department of Commerce announced the initiation of new anti-dumping (AD) and countervailing duty (CVD) investigations to determine whether passenger vehicle and light truck (PVLT) tyres from Korea, Taiwan, Thailand and Vietnam are being dumped in the US. If there are affirmative findings in these investigations and if the United States International Trade Commission determines that dumped and/or unfairly subsidised imports of PVLT tyres (from Korea, Taiwan, Thailand and Vietnam) materially injure/threaten material injury to the US industry, the USDC will impose duties on those imports. This would be in the amount of dumping and/or unfair subsidisation found to exist.
Sri Trang Agro Industry expects the findings to be announced in Mar 21. Therefore, there is no penalty for now. This news would urge customers to accelerate the stocking of Sri Trang Agro Industry's products before the new AD and CVD measures are enforced. Note that Sri Trang Agro Industry’s tyre sales to the US accounted for 5% of total sales.

We raise our Sri Trang Agro Industry's 2020-22 net profit projections by 16-156% as we have a more positive view on trend of rubber prices would benefit its natural rubber business.
Maintain BUY with higher target price of Bt48.25, based on SOTP-valuation.
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 have pegged Sri Trang Agro Industry's natural rubber business at 7x 2021F PE (below the stock’s 10-year mean of 13x) and the glove business at 8x 2021F PE (below -3SD of its competitor Top Glove (SGX:BVA)’s 5-year forward PE mean of 13.0x).
We expect Sri Trang Agro Industry's earnings to normalise in 2022.

Thunya Sutavepramochanon UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-10-22

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