20180315-辉立证券-Sri_Trang_Agro-Industry__Focus_on_profitability_rather_than_sales_growth_13页_632kb

Sri Trang Agro-Industry (STA) Summary

Core Content

Sri Trang Agro-Industry (STA), a Thai agribusiness company, experienced a significant financial loss in FY17, which doubled to Bt1,437mn from Bt718mn in FY16. The primary reasons for the loss were inventory writedowns and soaring SG&A expenses. Despite a 16% year-over-year (y-y) increase in sales to Bt89,387mn, the company's net profit was negative, and margins dropped nearly in half to 4.2% from 7.0% in FY16.

Main Points

• Financial Performance in FY17:

  • Net loss of Bt1,437mn, doubling from FY16.
  • Inventory writedowns totaled Bt344mn for the year, with Bt2,918mn in 1HFY17.
  • SG&A expenses increased by 8% y-y due to non-recurring charges from the demerger with Semperit and higher cess expenses.
  • Sales volumes declined 11% y-y to 1.32mn tons, while ASPs rose 28% y-y to Bt59.77/kg.
  • Share of profit from associates dropped 68% y-y due to the demerger.
  • Interest expenses increased 78% y-y due to higher debt.
  • FX gain of Bt562mn and other exceptional items of Bt504mn contributed to the financial results.

• Strategic Shift to Profitability:

  • STA has shifted its focus from sales growth to profitability.
  • Sales volume growth is expected to be only 6% y-y in FY18 to 1.4mn tons, significantly lower than previous years.
  • The company plans to boost its rubber glove production capacity to 16bn pieces in 2QFY18, up from 14bn in FY17.
  • Capex budget for FY18 is Bt2,767mn, with 38% allocated to rubber glove capacity expansion and 16% to concentrated latex.
  • The company expects a profit turnaround in FY18, with a net profit forecast of Bt1,523mn, representing a 206% y-y growth.
  • The outlook for rubber prices is less volatile, which should help manage inventories more efficiently.
  • Exceptional charges are expected to be absent in FY18, and SG&A expenses are projected to decrease by 15% y-y.
  • Share of profit from associates, particularly the high-pressure hydraulic hose business, is expected to rise 36% y-y.

• Valuation and Forecast:

  • The 'TRADING BUY' call is maintained for STA, with an upwardly revised target price of Bt12.90/share.
  • FY18 net profit is forecasted at Bt1,523mn, with a P/E ratio of 19.3.
  • FY19 net profit is expected to grow to Bt1,727mn, with a P/E ratio of 14.5.
  • The company is projected to have a P/B ratio of 0.7 for both FY18 and FY19.
  • Dividend yield is expected to rise to 3.8% in FY18 and 4.2% in FY19.

• Key Financials:

  • Sales for FY17 were Bt89,387mn, with a decline of 7% in FY18 to Bt83,431mn.
  • Net profit for FY17 was Bt-1,437mn, expected to turn positive in FY18 at Bt1,523mn.
  • EPS is expected to rise to Bt0.99 in FY18 and Bt1.12 in FY19.
  • BVPS increased from Bt15.15 in FY17 to Bt16.15 in FY18 and is projected to reach Bt16.82 in FY19.
  • Net debt to cash ratio is expected to remain stable, with a slight increase in FY19.

• Market and Industry Context:

  • The government's measures to support rubber prices, such as the joint venture with private companies, reduction in tapping, and export restrictions, have not significantly impacted prices due to a global surplus.
  • Global rubber output grew 6% y-y in FY17, while demand rose only 1.9%, leading to a surplus of 182,000 tons.
  • For FY18, the surplus is estimated at 126,000 tons due to other countries not joining the export pledge.

• Risk Factors:

  • Fluctuations in raw material costs.
  • Economic slowdown in major importer countries.
  • Market demand and supply for natural rubber.

• Corporate Governance and Compliance:

  • STA is part of the Thai CAC program, indicating a commitment to anti-corruption.
  • The company's corporate governance score is based on third-party surveys and may change.
  • Phillip Securities (Thailand) does not confirm the accuracy of the survey results.

• Peer Comparison:

  • STA's market cap is Bt18,586mn as of 12/17, with a P/E ratio of n.m. and P/B ratio of 0.8.
  • Peer comparison includes other companies in the agribusiness and rubber sectors, such as Thai Rubber Latex Corp (TRUBB TB) with a market cap of Bt3,336mn and a P/E ratio of 9.7.

Key Financial Summary

Growth and Margins

Conclusion

STA is shifting its strategy from sales growth to profitability, which is expected to result in a significant profit turnaround in FY18. The company is focusing on high-margin products and is investing in capacity expansion for its rubber glove business. Despite a global surplus, the company is expected to benefit from more stable rubber prices and reduced exceptional charges. The financial performance and valuation metrics suggest a positive outlook for the company in the coming years.