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Sri Trang Agro (STA TB) Summary

Core Content

Sri Trang Agro (STA TB) is a Thai-based company in the Industrials sector with a current share price of THB14.20 and a target price of THB11.50, representing a 19% downside. The company has a market capitalization of USD554M and an average daily trading volume (ADTV) of USD2M. Despite its 10% share of global natural rubber production, STA remains a price taker in both product and input markets.

Main Points

• Price Outlook: Natural rubber prices are expected to continue declining due to an oversupply situation, estimated at 600-700 kilotons, which is double the previous estimate. This will negatively impact STA's earnings.
• Earnings Performance: The company's 2014 core net profit is projected to be THB987.7m, a 45.5% YoY decline. The 2Q14 earnings are likely to be hit by inventory write-offs due to falling rubber prices.
• Financials: STA has experienced declining profitability with a pre-tax profit margin of 0.6% for 2014, and its net profit margin is also expected to fall. The company's return on assets (ROAA) and return on average equity (ROAE) have been declining, indicating poor returns.
• Valuation: The target price of THB11.50 is based on a LTM PBV-0.5x SD, reflecting a negative outlook. The company's share price is expected to align more closely with rubber prices in the future.
• Strategic Expansion: STA is expanding its operations with a target of 8,000 hectares of rubber plantations in Thailand by the end of 2014 and plans to increase its production capacity to 1.5-1.6m tons by 2015, which accounts for 11% of global demand.
• Market Share: STA currently holds 10% of global natural rubber consumption and 21% of Thailand's production volume. It is not yet able to influence prices despite its size.

Key Information

Financial Performance

Share Price Performance

Key Catalysts

• The market is optimistic about El Nino causing supply constraints, but this is not the case as the real issue is oversupply.
• The wintering season in Thailand, which coincides with the natural cycle of rubber trees, results in lower production but is not due to drought.
• STA's share price is expected to revert to tracking rubber prices as the market adjusts to the negative price environment.

Industry Analysis

• Natural rubber surplus is expected to rise from 2% to 6-7% in 2014, which will further pressure prices.
• Demand growth in rubber-consuming countries, particularly China, is slowing, contributing to the oversupply issue.

Corporate Strategy

• STA aims to expand its rubber plantation area to 8,000 hectares by the end of 2014.
• The company plans to increase its production capacity to 1.4 million tons in 2014 and continue expansion in the midstream business.
• STA's dividend policy is to pay 30% of net profit, with a target payout ratio of 50%.

Valuation Metrics

Conclusion

STA is currently facing a challenging environment with a significant oversupply in the natural rubber market, leading to declining prices and earnings. The company's financial performance has deteriorated, with declining profitability and returns. Despite its size, STA remains a price taker and is not expected to influence the market for the foreseeable future. The management believes the oversupply situation could take 4-5 years to resolve, which supports the SELL rating and the target price of THB11.50. The company's share price is expected to align more closely with rubber prices as the market adjusts to the current conditions.