In less than 24-hours Thailand is going to see the listing of the 1st company on the Stock Exchange of Thailand (SET) since the outbreak of the coronavirus, which hammered the capital markets all across the globe.
The last initial public offering (IPO) was that of Central Retail Corp. Plc (CRC) which has been nothing but a disappointing performer on the equity market ever since it was sold to investors at 42 baht a piece and started trading on February 20, 2020.
Investors who were hoping to make a quick buck from the listing of CRC may be feeling shortchanged because CRC has not been able to cross the 42 baht IPO price.
Tomorrow, July 2, will see the 2nd company list on the SET. The newly listed firm – Sri Trang Gloves Thailand (STGT), unlike CRC, seems to be there at the right place at the right time.
STGT is a subsidiary of Sri Trang Agro (STA), renamed from Siam Sempermed, and has been operating a rubber business since 1989.
STGT has successfully raised 15.1 billion baht – by offering 444.78 million shares at 34 baht per share. Following sale of new shares, 30% of 1.434 billion shares, STA will retain just about 51% of STGT.
STA’s plan to list STGT started before Covid19 breakout. The full-blown pandemic by March suddenly increased investor interest as the demand for the gloves exploded, which led STA to report super normal profit for first quarter of 2020.
As is the case during the IPO offering, STA worked to secure key investors, termed as cornerstone investors, from the foreign investors community. Over the past two years, foreign investors have shied away from committing subscription as cornerstone investors due to absence of quality of new listings, and poor investor sentiment. However, things were different for STGT, and its underwriter, Finansa, not only managed to secure a few cornerstone investors, but increased the IPO price as well.
The surge in demand for rubber products coupled with the rise in prices for gloves has given STGT and its parent company exceptionally good earnings during the 1st quarter of the year.
During the 1st quarter of this year STA reported a net profit of 854.15 million baht against a net loss of 627.68 million for the same period of 2019. Meanwhile, STGT also released its numbers for the 1st quarter this morning showing a net profit of 421.89 million baht against 156.6 million baht during the same period last year.
Analysts expect that STGT’s profit will rise further into 2nd and 3rd quarter from recently increased production capacity and, of course, rising selling price. The first of the many price and capacity increases kicked in during late February this year and more are set to come in the months ahead.
The capacity expansion has helped STGT become one of the top 3 global glove makers in the world, at a time when demand for gloves has surged to an all-time high, amid the outbreak of the coronavirus pandemic.
The prime reason for strong investor interest is a sudden rise in demand for gloves worldwide. Currently, STGT has capacity to produce 27 billion pieces per year, but it expects to produce 33 billion pieces this year, making STGT the world’s 3rd largest producer. Its regional competitors are three Malaysia based producers, Top Gloves with annual capacity of 82 billion pieces, Hartalega with annual capacity of 38 billion pieces, and Kossan which produces 32 billion pieces annually. These along with STGT, and Supermax, also based in Malaysia, account for 63% of the global production of gloves that according to some estimates was 300 billion pieces in 2019.
Demand for gloves – both rubber gloves and nitric gloves, which are special purpose gloves, may rise over 20% this year vs. 12%-15% pa rise in recent years. Sudden rise in demand – there are various stories of how many customers could not even get a quote at any price from sellers/distributors in April-May period – has led to sharp rise in profitability for most gloves producers.
STGT sells just about 15% of its production under its own brands in Thailand and overseas. It exports 90% its produce to Americas, Europe, Asia Pacific, and others. See the pie chart below. Due to long term supply contracts which carry fixed price for 1-3 months, STGT sells only 10-15% of its production at the spot price. For long term contract sales, it recorded an increase in selling price by 5% each since March 2020.
Analysts say spot price has risen 40-50% but may come off a bit in 3rd quarter as a few producers, mainly in Thailand, Malaysia and China, who faced cash-flow problems in 2019, have started to add supplies – for this is the time to make hay!!
In addition to the price rise, raw material price has fallen due to falling demand by auto and other industries. This ups the margin for gloves business.
So, near term prospects look particularly good for STGT. It has sold out this year production and would be able to add 4 billion pieces next year, and another 5 billion pieces more in 2022 according to a few analysts – STGT says it will have capacity to produce 50 billion pieces by 2025.
We have not seen many analyst reports – remember we use public information – to share profit forecast with our readers. Yet, simple extrapolation of reported 1Q20 profit by STA, leads to profit of 2.7-3.2 billion baht for 2020, followed by 3.5-3.8 billion in 2021.
Therefore, there is little doubt that demand for gloves would rise – at least by 15% this year. And this will mainly come from within Asia which has very low usage of gloves so far despite very high population and Covid19 infection rate. For example, in 2017, in per capita terms, India, Indonesia and China used just 1-6 pieces whereas Korea used 48 pieces, Japan 54 pieces etc. Europeans used between 70-137 pieces, and America 147 pieces.
Note that bulk of world population is in Asia – any rise in per capita demand in Asia is lot more than a 5% rise in Europe or America. This is however a double edge sword – Asians are poor and will not pay steep price. Instead, they may accept a substandard alternate. As we have seen in case of face masks and hand sanitizers – price rise was followed by multifold increase in supply in noticeably short time.
Should you buy STGT?
Recent listing of IPOs shows that high demand for IPO subscriptions is no guarantee for a successful listing – AWC, CRC, ACE etc. are good examples that show high PER stocks often fail to hold the IPO price.
If STGT earns 3 billion baht in net profit for 2020, and an increase of 10-12% in 2021, its market capitalization of 48 billion baht will translate into price-to-earnings ratio (PER) of 19x 2020, and 14x 2021.
In absence of comparatives, investors may compare PER rating with STGT’s larger competitors in the region most of which are trading on 35-40x PER 2020.
STA or STGT?
The big question then becomes should one buy the holding company or the subsidiary company when they want to invest. If one looks at STA (the parent company) then the shares of STA has seen a sharp increase over the past couple of months and year-to-date, the shares are up 187.50% amid hopes and expectations that STGT will list on the market and will benefit STA.
Therefore, whether the investor should buy STA or STGT will depend on what price STGT is trading on because holding companies usually trade at 20-30% discount to their FV based on subsidiary’s market price. Plus, STA has significant commodity business – plane vanilla low margin products and exposed to inventory losses based on global rubber prices. Hedge funds normally tend to sell parent and buy subsidiaries. One thing is assured is the fact that STGT will not disappoint the investors who have been looking to get over the jinx of CRC’s failure of not breaking through the IPO price resistance because STGT’s price is bound to go way past the 34 baht IPO price of the company