Analyst Sees a Positive on STA’s Rubber Glove Biz, Giving “BUY” at TP of ฿27

KTB Securities (Thailand) (KTBST) has maintained the recommendation of Sri Trang Agro-Industry Public Company Limited (STA) to “BUY” with an upgrade target price of ฿27.00/share.

 

Strike while iron is hot

KTBST reiterates a BUY rating on STA but raises the target price to ฿27.00 (from ฿19.00) following 2020E earnings forecast upgrade while maintaining the target PER at 14.0x (the mean of its 5-yr level). KTBST is increasingly positive toward STA’s earnings outlook following inquiries with the company. First, demand for rubber gloves remains strong given massive orders until mid-2021. Second, the average selling price for rubber gloves has increased by 5% per month in 2Q20 due to tight supply. Last, the baht weakness also lends support to earnings growth. KTBST thus raised the 2020-21E net profit forecast by 39-93% as revising up the gross profit margin assumption to 10.9% from 9.9% earlier and capacity utilization rate to 95% from 90%, which should increase rubber glove output to 28bn pieces.

STA’s share price outperformed the SET Index by 49% in three months as the COVID-19 pandemic has spurred global demand from rubber gloves. KTBST believes downside risk from the current share price will be limited given 1) the brighter 2Q20E earnings outlook, 2) the massive orders for rubber gloves until mid-2021, and 3) an attractive valuation, which currently trades at 2020E PER of 10x, below its 5-yr average level of 14.0x.

 

Event: Company update

Increasingly positive toward rubber glove business. KTBST is increasingly positive toward STA’s rubber glove business. According to the inquiries, demand for rubber gloves remains strong given the massive orders until mid-2021, while the average selling price has increased by 5% per month in 2Q20 due to tight supply. The baht weakness also lends support to STA’s earnings – the baht weakens to 31.00/USD, a level that benefits STA’s earnings performance.

 

Implication

Upgrade STA 2020-21E earnings forecast. KTBST raises the 2020-21E net profit forecast by 39-93% to ฿2.9bn and ฿2.3bn, as revising up blended gross profit margin assumption to 10.9% from 9.9% earlier and capacity utilization rate  estimate to 95% from 90%, which should increase rubber glove output to 28bn pieces. KTBST forecasts demand for both medical and non-medical rubber gloves, which generally provides high gross profit margin, to grow further given uncertainty about the COVID-19 outbreak, while the cost for natural rubber price will likely remain more stable after certain natural rubber producers had closed the business.

 

Valuation/Catalyst/Risk

STA target price increases to ฿27.00 (from ฿19.00) but KTBST maintains the target PER at 14.0x, which is the mean of its 5-yr average. Key catalyst is an upcoming listing of its subsidiary Sri Trang Gloves Thailand (STGT) on the SET in July. STGT is the producer of premium-quality rubber gloves. Key downside risk is slowed improvement in the manufacturing sector, particularly the auto industry.