Sri Trang Agro-Industry - UOB Kay Hian 2021-05-14: 1Q21 Earnings Expected To Be The Peak For This Year

SRI TRANG AGRO-INDUSTRY PCL (SGX:NC2)

Sri Trang Agro-Industry - 1Q21 Earnings Expected To Be The Peak For This Year

Sri Trang Agro-Industry's 1Q21 earnings were Bt5,958m, surging 598% y-o-y and up 8% q-o-q due to sales growth in the glove and natural rubber businesses. The 2Q21 gross margin was 43%, improving from 14% in 2Q20 but flat q-o-q. However, we expect 2Q21 earnings to drop q-o-q due to the lower ASP of the glove business.
We lower our Sri Trang Agro-Industry's 2021-22 earnings projections by 1-4%.
Downgrade Sri Trang Agro-Industry to SELL. Target price: Bt36.75.

Sri Trang Agro-Industry (SGX:NC2)’s 1Q21 earnings were Bt5,958m, surging 598% y-o-y and up 8% q-o-q. The earnings were 8% below our expectations as earnings from the natural rubber business were lower than our forecast. However, 1Q21 earnings were in line with the consensus estimate.

1Q21 sales surged 81% y-o-y and 20% q-o-q driven by higher sales in the glove and natural rubber businesses. 1Q21 gross margin was 43%, up from 14% in 1Q20 but flat q-o-q. The ASP for gloves in 1Q21 was US$76.4 per 1,000 pieces, surging 294% y-o-y and 21% q-o-q.
The 1Q21 cost-to-income ratio was 5.2%, down from 7.2% in 1Q20 due to higher sales.

Sri Trang Agro-Industry's management said that ASP of gloves in 2Q21 would decline by 15-20% q-o-q due to increasing market supply. Also, the ASP of gloves is expected to continue to drop every quarter by 15-20% q-o-q in 2H21.
For the natural rubber business, management expects that the ASP in 2Q21 will rise by 5-7% q-o-q following the uptrend in global rubber prices. It is expected that SICOM TSR20 will be 170-190 Ucents/kg for the rest of this year (In 1Q21 SICOM TSR20 was 167 Ucents/kg).
We expect Sri Trang Agro-Industry's 2Q21 earnings to decline q-o-q because higher earnings from the natural rubber business q-o-q will be offset by lower earnings from the glove business q-o-q.

We lower our 2021-22 earnings projections for Sri Trang Agro-Industry by 1% and 4% respectively as 1Q21 earnings were slightly below our expectations. We have yet to include the impact from the hemp business into our projections.

Downgrade Sri Trang Agro-Industry to SELL with a new target price of Bt36.75, based on SOTP-based valuation. 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 5x 2021F P/E (-3 standard deviation of its competitor Top Glove (SGX:BVA)’s five-year forward P/E mean of 13x).
We think Sri Trang Agro-Industry's earnings will normalise in 2022.
See

Thunya Sutavepramochanon UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-14

SGX Stock Analyst Report SELL DOWNGRADE HOLD 1.56 DOWN 1.660