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Sunday, 16 August 2020

(Tradeview 2020) Long Term Value Pick 3 - Sri Trang Agro-Industry (Biggest Laggard of The Glove Sector)

Sri Trang Group Everest Logo (1) | Rowing from Home to Home


Dear fellow readers, 

This is my Long Term Value Pick for 2020. 


Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :


Website / Blog : http://www.tradeview.my/
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or Email me to sign up as private exclusive subscriber : [email protected]

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Long Term Value Pick 2020 : Sri Trang Agro-Industry PCL (Initial Fair Value SGD $ 1.90 / THB 43.20 ) 

This is my third “Long Term Value Pick series for 2020”. In the past, my long term value picks include the likes of Allianz, QL, DKSH, RCE Capital, Poh Kong, Riverstone Holdings, Oriental Holdings amongst others. This does not mean I only have few stock which I like but rather to be classified as Long Term Value Pick it must meet 5 of my stringent criteria as below :

1. Strong, honest and capable management team / owner
2. Consistent Growth, Earnings & Dividend payout
3. Strong balance sheet & cash position / cash flow
4. Can hold across decades / generations without risk of delisting or bankruptcy
5. Undervalued & lack of appreciation from investors

It is extremely hard to find a stock that can meet all the above mentioned criteria. This doesn’t mean all other stocks are lousy stocks but rather, to find a stock that I am willing to lock in my funds long term, it requires utmost justification as the time value of money must correspond with the potential return otherwise it is an act of futility. 

So why did I pick Sri Trang Agro ?   





1. Thailand Origins



Sri Trang Agro-Industry PCL was founded in 1987 and IPO in Stock Exchange of Thailand (SET) in 1991 at the price of THB 60 (Par value THB 10 - today Par value THB 1). It subsequently did a dual listing in SGX at IPO price of S$1.20. It remains the only dual listed Thai Stock in SGX today. It is one of the world largest natural rubber supplier with 8% global market share & glove manufacturer with 7% global market share. Based on data from MARGMA, Malaysia as a country controls 65% of world’s gloves supply. The second largest country is Thailand with 18% of world’s supply. From this you can see, Sri Trang is the largest glove manufacturer in Thailand. Whenever we talk about gloves, everyone has heard about the "4 Kings" of the glove sector in Malaysia, namely Hartalega, Topglove, Kossan and Supermax. Sri Trang Agro together with the 4 are known the Big 5 with Sri Trang Agro coming in number 3, bigger than Kossan with an annual capacity of 33 Billion gloves. 





The Chairman and founder of the company, Mr Viyavood Sincharoenkul was PHD graduate in  Chemistry from Queen Mary University, London. He originally returned to Thailand after graduation for a short visit as he was supposed take a Professorship in United States however he joined a rubber company in Hat Yai, Southern Thailand before setting up their own small outfit.  with his father (who retired) renting a small rubber factory in 1987. The rest is history. Sri Trang is part of SET 100 index and as a fully integrated rubber player with their own rubber plantation, natural rubber latex processing facilities and glove manufacturing factories, Sri Trang controls end to end process from upstream to downstream.





2. Growth, Expansion and Strong Market Leadership Position 

Unlike Malaysia where there are many world class glove manufacturers supplying to international markets such as Hartalega, Top Glove, Kossan, Supermax, Riverstone, Comfort amongst others, Thailand has few world class players (many of which has JV with foreign firms) with the market leader being homegrown Sri Trang Agro. Sri Trang Agro is the Hartalega & Top Glove of Thailand enjoying a strong legacy and dominant position via their associated company Sri Trang Gloves. In fact, Sri Trang Gloves recently IPO at THB 34 whereby Sri Trang Agro still retains 51% stake and released 20+% for unlocking of value in the IPO exercise. The performance of Sri Trang Gloves was truly phenomenal more than doubling since July 2020. 




In addition, the company controls also another listed company by the name of Thai Rubber Latex Corporation which is mainly in the business of supply of natural rubber latex raw materials for many products such as tyres, medical devices, gloves and others. Sri Trang Agro controls the end to end process as they cultivate the rubber plantation with over 7200 hectares and manufacturing facilities to process concentrated latex. They also have their own distribution arms and ventures in various overseas markets such as Myanmar, Indonesia, Shanghai, Qingdao etc. Even Malaysia gloves manufacturers purchase their raw materials from Sri Trang Agro over the years. This is especially applicable to latex gloves producers. Furthermore, they have foreign partners like Austrian Semperit and Japanese Itochu in the early years though today they are mainly running business fully in control.




3. Outstanding Financials and Balance Sheet (Updated with Q2 2020 Results)

What is important to us will always be the strong financial numbers and balance sheet of of a company before investing. Sri Trang Agro fulfils this criteria. We believe the reason they can manage well although they have huge exposure to the commodities cyclical nature as one of the largest supplier of natural rubber latex in the world is their ability to have end to end control via their own products developed (Gloves) instead of solely relying on their MNC clients in the automotive, logistics, healthcare & other sectors to take orders for the natural rubber latex raw materials. Have a look at the numbers for a 6 months period below :



Sri Trang Agro current assets as not June 2020 stands at THB 32.2 Billion, whereas the total liabilities (non-current & current) stands at THB 25.5 Billion. This means the current assets alone is sufficient to cover the total liabilities. This is extremely impressive. Due to the recent strong earnings in the latest 2Q2020 results, the cash balance stands at THB 16.5 Billion. Similar to other Big 4 gloves players, the cash received from the strong sales exceed expectations although it is not yet fully net cash companies, it is close to it. 


Sri Trang Agro declared such a stellar quarter, (Sri Trang Gloves contributed 32.5% of overall) whereby the profit ballooned to THB 1.094 Billion compared to THB 270 Million year before. QoQ, the net profit increased from THB 840 Million which is 28% jumped (despite sharp fall in natural rubber latex commodities price). In addition, the net cash flow exploded to THB 16 Billion compared to THB 2.6 Billion the year before.







At today’s price of THB 26 / SGD$1.21 (Sri Trang Agro SG trading at slight premium to Sri Trang Agro Thai), it is extremely low compared to the actual value be it book value or earnings yield. Please note that we first shared above Sri Trang few months back when we highlighted Riverstone. The thing is Riverstone has went up to $4.08 today where as Sri Trang Agro SG is still trading at only $1.21. If we summarise the financial numbers, it can be read as below based on trailing quarters :

Trailing PER = 9X 
Forward Dividend Yield = 2.88%
ROE = 7.41%


The results EPS is THB 0.71 for recent 3 months QR & 6 months June 2020, the EPS is THB 1.27. Assuming we annualised the EPS by 4 Quarters, it is THB 2.84 for full year. At current price of THB 26, it is only trading at 9x. At 2ox PER, the fair value should be worth THB 49.60. However, we must not forget that Sri Trang Gloves went for IPO in July 2020. So there will be minority interest calculation moving forward. I will explain further below 


4. Future & Continuous Growth Potential  + Improving Outlook (Both Commodities & Sector Tailwind)





This stock is clearly a beneficiary of Covid-19 pandemic and also affected by the demand shock resulting from the pandemic to their natural rubber latex supply. Thankfully, following the lockdown globally, the pent up demand is driving the increased demand & price for TSR, RSS and Latex concentrate in the coming months. In fact, even the commodities prices have performed much better compared to April & May surging above pre-Covid 19 level. Have a look at the chart below :





5. Value Growth Investment - How Cheap is Sri Trang Agro-Industry?



With the share price being consistently whacked down, even when it rebounded, it was dumped again. This repeated many times for  Sri Trang Agro. At some point, I even wondered whether I made a huge mistake. Some of my subscribers also constantly voiced their concerns to me as they were worried with their diminishing profits. I too was worried that their natural rubber supply division would be impacted severely that the profits from their glove division wouldn’t be enough to compensate. After all, the biggest users of natural rubber was the automotive & logistics sector (tires). Clearly, the irrational price movement also affected my confidence and state of mind. But I held on.

From the results, indeed revenue fell 12% QoQ but thanks to the gloves divisions, the net profit was still able to grow 28% QoQ and 305% YoY. The best part is, because of the overall market sentiment and lack of confidence of investors whereby no one expect it would do well, the continuous sell off has resulted it to be so cheap and laggard compared to peers as well as value for the entire company. Our valuation of its true value after factoring the minority interest given the IPO of Sri Trang Gloves in July 2020 are as below :

Net profit Q2 - 2020 : THB 1.094B
Total Shares issued : 1.54B
EPS for the Q2 : 0.71 sens 
Annualised 4Q : THB 2.84

At 56% shareholding post IPO (Prior IPO was 81%), combining Sri Trang Agro & subsidiary Rubberland Products Co Ltd. : 

PE 15x  - THB 32.40 (SGD $1.43)
PE 20x - THB 43.20 (SGD $1.90)
PE 25x - THB 40.09 (SGD $2.16)

Currently it is only THB 26, which is a single digit below 10x PER valuation with a strong forward earnings outlook and coming rebound in natural rubber price & demand. I haven’t even factored in further ASP hike, capacity expansion of their gloves division, rebound in natural rubber price & most importantly the arbitrage gap between Holding Co discount & Subsidiary Sri Trang Gloves which is trading at 30x PE last week prior results announcement. Originally when I saw Citigroup research and TP of Sri Trang Agro was THB 71 (base case), I was thinking this is too bullish. Now, all I can say, it is not impossible.


6. Conclusion - To Invest? 

The ever changing landscape of healthcare, hygiene and sanitisation will spur continued growth of Sri Trang Gloves and with additional capacity brought forward, Sri Trang is poised to maintain its position amongst the world Big 5 gloves manufacturers in the world. The potential is limitless with new markets and demand globally. Even if the demand may normalise once a vaccine is found, the behavioural change is set in motion just as how SARS pandemic brought about different approach when it comes to utilising PPE and attitude of healthcare professionals in handling patients. Furthermore, the automotive, logistics and healthcare sector will continue to help sustain demand even after the pandemic. Either way, heads you win, tails you win. Sri Trang’s business model paid off where it controlled end to end from raw material supply to OEM of finished product. It is just like a chef who is good at cooking & selling Nasi Lemak, he owns the anchovies farm, paddy field and sambal processing facilities which he supply himself for his Nasi Lemak but also sell to other F&B restaurants at the same time.

For those who likes such a company and would want some overseas investment exposure, one can consider Sri Trang Agro-Industry PCL. As it is dual listed, you can consider Sri Trang Agro Singapore instead of Sri Trang Agro Thailand as not everyone can access SET. We are personally invested and we believe this company will keep growing. This was a difficult and complex analysis due to the many parts and subsidiaries, associate companies involved but it was worth it. Simply because, it is the cheapest and most laggard glove stock at the moment.

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Food for thought: 





17 comments:

  1. The global rubber share is already 10%, no longer 8%

    ReplyDelete
  2. Humongus 3rd quarters earnings release in November 56% contributions will rule the day for this undervalued unloved stock STA!!!

    ReplyDelete
  3. Dear author, pl note that STA does not own Thai Rubber and Latex Company which has recently reported 2nd quarters losses.
    Pl correct your article as very misleading.
    STA has some shares in the company Thaitex Rubber.

    ReplyDelete
  4. I can tell you so because of an international rubber dealer.
    Rpt: STA is a shareholder of Thaitex Rubber, a rubber producer but not a latex producer.

    ReplyDelete
  5. Hi joker, all u nd is 5 mins 2 read b4 accusing d author. In d article, there is a big Corporate Shareholding Structure tt shows Sri Trang Agro owns 16.67% of Thai Rubber Joint Venture Ltd which in turns own 16.67% of Thai Rubber Latex Corporation Bhd (the listed co). So I think u owe d author an apology. The joke is on u man.

    Lastly, Sri Trang is a natural rubber supplier. It is also a latex supplier. How do I noe? In their financial report - it shows Latex contribution is 2% for 2Q2020 for the quarter. I am not an international rubber dealer, I just happen 2 have common sense & ability 2 read.

    ReplyDelete
    Replies
    1. Bro do you know personally the owner of Sri Trang Agro???
      I tell you I know him personally and his name is Dr Viyawood!!
      His brother is Paul Lee is the MD of Sri Trang International Spore.
      Why not you make a phone call to Sri Trang International STA's rubber dealing arm and verify????

      Delete
    2. Sure js you have common sense and ability to read, but you are just plain stupid!!!
      STA has another associate company called Rubber Land which has been set up long time ago to enjoy added tax incentives and is the actual supplier to their Gloves company, STGT.
      You mentioned Thai Rubber Corpn Bhd.
      No such company as Bhd!!!!

      Delete
    3. Besides in financial report, there is no mention of Thai Rubber Latex Corpn
      Pl get your facts right.
      No brainer, I say!!!

      Delete
    4. Read the Annual report Stephen. Don be lazy. Financial report is small part of Annual report. Yes, Thai Rubber Latex Corporation PCL,not Bhd, typo. But u don be moron. No one talking bout Rubberland. Both Rubberland & Thai Rubber Latex Corporation PCL is in the Sri Trang structure, read b4 u talk.

      Delete
  6. Bro if you are not from the rubber fratenity please do not spout nonsense and get your facts right.
    Definitely I know better than you as I am international rubber dealer and I do business with Sri Trang Agro Thailand regularly.
    No need to defend the author as he has mistakenly penned Thai Rubber and Latex is being owned by STA Thailand.
    I shall reinterate and repeat for you and author's benefit that STA is infact a 42.5% shareholder together with Southland Rubber together with 15% shareholding by Itochu Japan of THAITEX RUBBER Rubber, repeat THAITEX RUBBER and not Thairubber and Latex!!!!!!

    ReplyDelete
  7. This comment has been removed by the author.

    ReplyDelete
    Replies
    1. This comment has been removed by the author.

      Delete
  8. Eh Stephen Tan, Unknown, Dont be a moron. But since u 2 hv no common sense & readin skill I will answer last time wit 3 simple points :

    1. Sri Trang Agro own 16.67% Thai Rubber Joint Venture Ltd where Thai Rubber Joint Venture Ltd consequently owns 16.67% of Thai Rubber Latex Corporation as per the picture in uploaded in author article. If u cant read, I upload d link to Sri Trang official website so U can read d corporate Structure. After all u 2 r so dim u cant even do proper research : https://www.sritranggroup.com/en/about/shareholding-structure

    2. Thaitex Rubber is d old name of Thai Rubber Latex Corporation which is the listed company. They changed their name. I thought you r international rubber dealer, how come u so stupid, Thaitex Rubber change name oso don noe. Please read the link here idiot

    https://www.thaitex.com/en/aboutus

    https://en.wikipedia.org/wiki/Thai_Rubber_Latex_Corporation

    3. Financial report clearly shows their shareholding structure including shareholding in Thai Rubber Latex Corporation Ltd 16.67%. It is in the annual report, but u dunno how 2 read how?

    Life got many nincompoop, u say u gud fren with Sri Trang Tauke, can u call him ask 1st b4 barking like a dog with rabies? D world is a messed up place cause of nincompoops like u.

    ReplyDelete
  9. URE REALY AN IDIOT - NOW CHANGE TUNE HAVING 16.67% STAKE MEANS NOT OWNED BY SRI TRANG AFTER REALISING UR MISTAKE?

    WAT KIND OF SHAMEFUL IDIOT R U? ITS LIKE UR INTELLECT IS SO LOW U SHUD REALLY JUST STOP WASTING UR LIFE. NOW WANT TO CHANGE STORY?

    THAI RUBBER LATEX CORPORATION CHANGE NAME FROM THAITEX, YOU WANT TO TALK ABOUT JV WITH ITOCHU AND NOW U EMBARASSED TALKING ABOUT RUBBERLAND ISIT? SO SHAMEFUL TO BE U. I AM SO ASHAME TT U AN IDIOT LIKE U EVEN ROAM THE WORLD

    ReplyDelete
  10. https://www.set.or.th/set/companyholder.do?symbol=TRUBB&ssoPageId=6&language=en&country=US
    Idiot js, go and goggle to find out whether STA is a shareholder of Thai Rubber and Latex Corpn.

    ReplyDelete
    Replies
    1. Eh Unknown Nimcompoop, why u post the same link i post to u & tell me the same thing, tt I am right?

      U din noe Thaitex changed named to Thai Rubber Latex Corp PCL den u confuse ThaiTec Rubber & Thaitex. Den u cant win argument, start cussing like a nincompoop mad fella who is flustered ure wrong even tho u say u noe the owner of Sri Trang, brother & family. Damm shameful cant even read d corp structure properly don even talk like ure big shot in rubber trading. I think u cant even do rubber tapping la idiot.

      Admit oredi that Sri Trang has 16.68% den say its not ownership. If hav 16.67% is not owning shares, den y Sri Trang website show d corporate structure shareholding? U arguing 4 fart ar?

      Delete
    2. https://www.sritranggroup.com/en/about/shareholding-structure

      Read tis dumb ass. Sri Trang owns 16.67% via Thai Rubber Latex Corp PCL via Thai Joint Venture Ltd. U hv guts, post ur name, number, address. I find u. Remember show ur credential of "Internatonal Rubber Trader". Don hide behind d screen like keyboard warrior talking rubbish. I think ure "International RUbber Tapper"

      Delete