• We think Sri Trang Agro-Industry's 2H20 net profit would double that in 1H20, driven by the glove business. Earnings would continue to make a record high in 3Q20 and peak in 4Q20 for the year. 2021-22 earnings would remain strong but more normalised.
• Maintain BUY. Target price: Bt45.50.

Bright Earnings Prospects in 2H20 for Sri-Trang Agro-Industry

• Bright earnings prospects in 2H20, driven by a huge jump in ASP in the glove business. Sri Trang Agro-Industry (SGX:NC2, STA TB) management expects ASP would surge by at least 70% q-o-q in 3Q20 and increase 12% q-o-q in 4Q20 (2Q20 ASP: US$20.70/’000 pieces).
• Selling volume under long-term contracts which have low ASP would mostly have a been delivered in 2Q20. We think Sri Trang Agro-Industry's 2H20 net profit would double that of 1H20 earnings, continue to make a record high in 3Q20 and peak in 4Q20 for the year.

Natural Rubber Performance Would Improve This Year Amid a Dim Market

• Management forecasts global demand for natural rubber this year at 12.12m tonnes, down 11% y-o-y, owing to the COVID-19 pandemic impact. Note that demand for natural rubber from the tyre industry accounts for 71% of global natural rubber consumption. However, Sri Trang Agro-Industry’s natural rubber business would be profitable this year, a turnaround from a net loss of Bt662m in 2019, on an expected larger market share of 25-30% in 2020 (2019: 22%) as large local competitors faced financial problems last year.

Glove Business Outlook Remains Strong Until 2021

• Management said glove demand remains strong with sales backlong now reaching mid-21 for latex gloves and Dec 21 for nitrile gloves. New customers have to make full payment in advance while small and medium-sized customers have to make about 20% of full payment in advance. In addtion, there are no cancellation of orders. Management also plans to expand capacity expansion to 70b pieces per year by 2026.

Sri Trang Agro-Industry - Valuation & Recommendation

• Maintain BUY on Sri Trang Agro-Industry with a higher target price at Bt45.50, based on SOTP valuation. We peg value the natural rubber business at 7x 2021F PE (below the stock’s 10-year mean at 13x) and the glove business at 21x 2021F PE (in line with Kossan Rubber Industry’s 5-year mean PE of 21x).
• Share price catalyst: Rising global glove demand.

Source: UOB Kay Hian Research - 19 Aug 2020