• Sri Trang Agro-Industry reported 1Q20 net profit of Bt854m, turning around from the net loss in 1Q19 and the small net profit in 4Q19. Key drivers were solid sales growth and very strong gross margin.
• We think 2Q20 earnings would be softer q-o-q due to the very high base in 1Q20, lower rubber prices and Covid-19 impact. However, 2H20 earnings would grow y-o-y due to a very low base.
• We raise our 2020 Sri Trang Agro-Industry's net profit forecast by 25% as 1Q20 earnings were much higher than our expectation.
• Maintain BUY with a higher target price of Bt19.20.

Sri Trang Agro-Industry's 1Q20 Results

High earnings.

• Sri Trang Agro-Industry (SGX:NC2) reported 1Q20 net profit of Bt854m, turning around from a net loss at Bt628m in 1Q19 and net profit at Bt74m in 4Q19, mainly on higher sales and wider gross margin.

Glove Business Would be Excellent This Year

• Management revealed that demand for gloves has been rising significantly since the beginning of this year when Covid-19 started its outbreak in China. Sri Trang Agro-Industry has gradually increased ASP for glove exports and expects glove ASP would increase by 15% y-o-y this year. Note that glove export sales make up 85-90% of total glove sales.
• Sri Trang Agro-Industry's earnings were more than double of our and consensus projections, thanks to very strong gross margin. 1Q20 sales grew 18% y-o-y and 18% q-o-q as sales of natural rubber increased 15% y-o-y and sales of gloves surged 26% y-o-y. Note that sales of gloves accounted for 22% of total sales.
• Gross margin was 14%, improving from 1% in 1Q19 and 9% in 4Q19, because of:
  1. fewer competitors in the local rubber industry; and
  2. strong demand for gloves due to Covid-19 pandemic.

2Q20 Earnings Would be Softer Qoq

• Key drags to Sri Trang Agro-Industry would be:
  1. lower y-o-y and q-o-q sales of natural rubber business, impacted by declining rubber prices and Covid-19;
  2. slimmer gross margin for natural rubber; and
  3. very high earnings base in 1Q20. However we believe the glove business would remain strong in 2Q20.

Maintain BUY With a Higher Target Price of Bt19.20

• We raise our 2020 net profit projection by 25% as 1Q20 earnings were much higher than what we had expected.
• Maintain BUY on Sri Trang Agro-Industry with a higher target price of Bt19.20, based on sum-of-the-parts valuation. (Using FX rate of 100 THB to 4.4396 SGD, we derive target price of 0.852 in SGD term).
• We use 10x 2020F PE (which is slightly below the stock’s 10-year mean at 13x) for its natural rubber business. We use 23x2 020F PE (which is slightly its competitor, Kossan Rubber Industry’s 5-year PE mean of 21x) for its glove business.

Source: UOB Kay Hian Research - 15 May 2020