Sri Trang Agro-Industry - UOB Kay Hian 2021-02-18: Earnings To Reach A Historical Peak In 2021

SRI TRANG AGRO-INDUSTRY PCL (SGX:NC2)

Sri Trang Agro-Industry - Earnings To Reach A Historical Peak In 2021

Sri Trang Agro-Industry posted an impressive net profit of Bt5,499m in 4Q20, surging from Bt74m in 4Q19 and Bt2,084m in 3Q20 on healthy performances from both its glove and natural rubber businesses.
1Q21 earnings would continue to grow both y-o-y and q-o-q, driven by higher glove ASP. In addition, Sri Trang Agro-Industry plans to start a hemp plantation business in Mar 21, and expects this business to earn Bt450m in revenue in 2022.
We think Sri Trang Agro-Industry's 2021 earnings would reach a historical peak.
Maintain HOLD. Target price: Bt37.50. Entry price: Bt31.50.

Sri Trang Agro-Industry (SGX:NC2)'s 4Q20 earnings came in at Bt5,499m, surging from Bt74m in 4Q19 and Bt2,084m in 3Q20. See Sri Trang Agro's announcements. The earnings were higher than our and consensus estimates by 20% thanks to robust gross margin and low SG&A expenses. Note that 4Q20 earnings can be broken down into:
- glove business: Bt4,780m, and
- natural rubber business: Bt719m.
4Q20 sales surged 76% y-o-y and 59% q-o-q, driven by glove sales. Sales during the quarter can be broken down into:
- gloves: 52%, and
- natural rubber business: 48%.
Noted that 4Q20 glove ASP was US$63.3 per 1,000 pieces, while 3Q20 ASP was US$36.30 per 1,000 pieces. 4Q20 gross margin was 43% (glove gross margin was 72%, natural rubber gross margin was 12%), improving from 3Q20’s gross margin of 34% (glove gross margin was 60%, natural rubber gross margin was 8%).
Sri Trang Agro-Industry's 4Q20 cost-to-income ratio was 5.1%, down from 6.1% in 3Q20.

The key drivers are:
1. higher glove ASP (+20% q-o-q) on the back of solid demand, and
2. healthy gross margin of the natural rubber business following to an uptrend in natural rubber prices, supported by recovery in the global automobile industry.
Management believes that it is now a seller’s market in the glove industry due to a massive global supply shortage. It has backlog orders until 2022 for latex gloves, and till 2023 for nitrile gloves.

Sri Trang Agro-Industry's management targets glove capacity to reach 50b pieces in 2022 and 71.32b pieces in 2023, in order to capitalise on the strong demand amidst a global glove supply shortage.
In addition, Sri Trang Agro-Industry will launch a new type of latex glove in 2H21, which is suitable for those with protein allergies. It will be priced lower than nitrile gloves and will target the US and Europe markets.

Sri Trang Agro-Industry plans to start a hemp plantation business in Mar 21 with an initial planting area of 100-200 rai, from its own vacant land. At 100-200 rai, management believes Sri Trang Agro-Industry will have the largest hemp planting area in Thailand.
Given that 1 rai of hemp trees can produce about 15kg of cannabidiol oil, which has a selling price of Bt100,000/kg, the hemp business is expected to earn at least Bt450m in income in 2022 (crops should be harvested three times a year).

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 revise up our 2021 and 2022 earnings projections by 44% and 17% respectively as 4Q20 earnings were stronger than our expectations. Note that we have yet to include the impact from the hemp business into our projection.
Maintain HOLD on Sri Trang Agro-Industry with a new target price of Bt37.50, based on SOTP-valuation. See the latest FX rates of THB vs S$. We value the natural rubber business at 7x 2021F P/E (below the stock’s 10-year mean of 13x) and the glove business at 5x2 021F P/E (-3 standard deviation of its competitor Top Glove (SGX:BVA)’s 5-year forward P/E mean of 13.0x).
We think Sri Trang Agro-Industry's earnings would normalise in 2022.
Sri Trang Agro-Industry has just announced to pay 2020 dividend of Bt1.75 per share, with ex-dividend on 12 Apr 21. See Sri Trang Agro's Dividend History.

Thunya Sutavepramochanon UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-18

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