KGI Securities has reiterated “Outperform” rating on Sri Trang Gloves (Thailand) Public Company Limited (STGT) with an unchanged target price at Bt125 per share after the reporting of over 40 times profit growth in 3Q20.
KGI stated that STGT posted its highest ever quarterly net profit at Bt4.4bn (+3,459% YoY, +317% QoQ) in 3Q20, driven by higher revenue. Excluding non-operational items, its core profit was Bt4.2bn (+4,094% YoY, +269% QoQ), beating KGI’s estimate by 23.0% and the consensus by 24.9%.
The positive surprise was led by higher-than-expected profitability. The company announced a dividend of Bt1.25 per share, implying a payout ratio of 84% of its 1H20 reported EPS, and a change of par value from Bt1.0 per share to Bt0.5 per share, thereby increasing its outstanding shares to 2,857.6mn shares from 1,434.8mn shares.
In 3Q20, STGT booked total revenue of Bt8.1bn (+169.9% YoY, +67.6% QoQ), in line with rising average selling price (ASP) of US$36.3/000 pieces (+83.9% YoY, +75.3% QoQ). The company achieved a high GPM of 60.3% for the quarter, jumping from 10.9% in 3Q19 and surpassing KGI’s earlier estimate of 51.5%. On the other hand, its SG&A-to-revenue ratio was 2.9%, down from 6.4% in 3Q19 and our estimate of 4.2%, reflecting better-than-expected operational efficiency.
For the quarter, the company reported a FX gain of Bt139mn, compared to a gain of Bt24mn in 3Q19 and a loss of Bt77mn in 2Q20. In addition, STGT obtained an interest rate subsidy of Bt79mn from Rubber Authority of Thailand (RAOT) for its capacity expansion.
However, STGT reported sales volume of 7.1bn pieces (+42.8% YoY, -3.2% QoQ) in 3Q20. The substantial rise YoY was driven by its aggressive expansion while the small decline QoQ was due to shipping logjams, which caused delays in overseas ocean freight, especially to the US. Thus, reported sales volume was 4% shy of KGI’s original estimate. Nevertheless, STGT disclosed that its manufacturing facilities ran at full capacity with a utilization rate of 95%.
In addition, STGT announced the purchases of an 84% stake in Premier System Engineering Co.,Ltd. (PSE) for Bt1.1bn and a 100% stake in Sadao P.S.Rubber Co.,Ltd. (PS) for Bt147mn, and the acquisition of land plots in Songkhla and Chumphon provinces for a combined value of Bt246.7mn. The first investment should allow STGT to better manage its plan with PSE, which has expertise in designing and producing latex gloves machineries. The second investment should allow STGT to use PS’s land to construct a new factory in Sadao district.
Nevertheless, lower-than-expected average selling price, sooner-than-expected mass production of a COVID-19 vaccine, and higher-than-expected raw material prices could be risks to STGT’s upside.