This is my Long Term Value Pick for 2020.
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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 ?
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.
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 :
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.
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:
https://klse.i3investor.com/blogs/tradeview/2020-08-16-story-h1512363758-_Tradeview_2020_Long_Term_Value_Pick_3_Sri_Trang_Agro_Industry_Biggest_.jsp
