Analysts Expect Bright Earnings for STGT with a 69% 3-Year CAGR as Gloves Sales Soar!

Kasikorn Securities (KS) initiated its coverage on Sri Trang Gloves (Thailand) Public Company Limited (STGT) with an “Outperform” rating with a 12-month target price at ฿43.40/share.

 

KS stated that the target price at ฿43.40/share is based on average 2021E and 2022E fully diluted core EPS of Bt2.05 pegged to 21.2x PER, which is in line with the seven-year historical forward PER mean of STGT’s global peers. The target price implies a 2020E PER of 18.6x.

In KS’ coverage, the security company cited that STGT is the largest rubber glove producer in Thailand and the world’s third largest with 33bn pieces/year (as of March 2020) after Malaysia’s Top Glove and Hartalega.

STGT plans to double installed capacity to 70bn pieces/year by 2028. The increased capacity is aimed to serve growing demand especially in developing and emerging countries where with 4-10 are consumed per capita vs. 150 pieces in the US. Increasing interest in healthier lifestyle trends, the need to control outbreaks of disease, and a higher awareness of the need for hygiene will also create more demand for rubber gloves.

 

KS stated that strategic location is a key barrier to entry for new competitors. Southeast Asia, particularly Malaysia and Thailand, is the main source of the world’s rubber gloves, and there are only few that manufacture the product, resulting in the market being an oligopoly.

There are several reasons for this. First, the sale of rubber gloves is subject to stringent regulations in some markets, such as the US and Europe. STGT has an advantage compared to new competitors as it has already applied for many standards and certificates. Second, STGT is located in Thailand where its parent company, STA, operates both an upstream and midstream business, which keeps operating expenses low, such as transportation and inventory handling. STGT is also a domestic manufacturer, and as such it is both not subject to a concentrated latex import tax (CESS) and has GSP privileges in contrast to its competitors in Malaysia and China that are subject to higher export tariffs. Third, it is capital consuming.

 

The use of rubber gloves grew continuously in developing countries over the period of 2016-2019 and resulted in average industry growth of 12.2%, which was before the outbreak of COVID-19 in early 2020 around the world. One-off events such as disease outbreaks created a new normal/structural change in many industries, such as cashiers in retail stores wearing rubber gloves.

The COVID-19 outbreak coincided with STGT’s plan to expand capacity, which should thus enable it to operate at almost full capacity almost immediately after it comes on line. We believe the public will remain aware of the need to maintain good hygiene after the COVID-19 outbreak dissipates.

 

In addition, KS expected STGT to deliver a strong earnings growth CAGR (2019-22E) of 69% on higher sales volumes and GPM and a lower effective tax rate from BOI privileges. KS expected STGT to operate at almost full capacity in 2020 with sales of 28bn pieces (+43% YoY) on capacity expansion and increased demand amid COVID-19. KS expected GPM to widen to 25.1% in 2020 from 12% in 2019 mainly on sales volume growth of 43% YoY and a higher average selling price (ASP) of 12% YoY.

Beside Kasikorn Securities, Finansia Syrus Securities also had a positive view on STGT and recommended a target price at ฿45.00/share. Meanwhile, Maybank Kim Eng gave a fair value of STGT at ฿56.00/share. Lastly, Capital Nomura Securities cited the consensus to give a ฿42-฿50/share target price.