STK – Headwinds are still ahead – Update

• STK posted VND530bn in 2Q22 revenue (+3.9% yoy) and VND76.3 in net profit (-2.0% yoy). 1H22 earnings fulfilled only 41.4% our forecasts.
• We lower STK’s FY22F/23F revenue by 8.5%/4.3%, respectively, to reflect the sluggish demand for textiles & garment of US market.
• Downgrade to Hold rating with lower TP of VND52,800/share.

Weak global demand and FX loss weigh on 2Q22 bottom line

2Q22 revenue grew modestly 3.9% yoy to VND530bn following a decrease in orders. Gross margin edged up 0.4% pts yoy to 19.8% thanks to higher contribution from recycled yarn “plus” products. However STK recorded a loss of VND9.6bn in net financial expenses due to FX loss (import PET chip contract and short term debt in USD). As a result, STK posted VND76.3bn in NP (-2% yoy). For 1H22, revenue and NP recorded VND1,170bn (+9.0% yoy) and VND146bn (+3% yoy), fulfilling 44.8% and 41.4% of our forecasts.

More headwinds arise

Increasing inflation and tighter financial condition has cast shadow over the US and European economies which led to a contraction in global demand since 2Q22. We believe the demand of premium clothes such as shirt and T-shirt made from recycled yarn (higher price) will slow down in 2H22F. Thus, we lower STK ‘s FY22F/23F revenue by 8.5%/4.3%, respectively to reflect the ongoing sluggish demand. We expect STK is able to maintain gross margin improvement into FY22-23F thanks to cooling down PET chip price in 4Q22F and focus on promoting to virgin AAA and recycled “plus”. FY22F earnings is estimated to grow 8.5 % yoy, softer than that of 27.2% yoy in previous forecast. We expect earnings to rebound 29.3% yoy in FY23F thanks to 1) lower input material price; and 2) rising contribution from the new Unitex factory.

The new Unitex factory progress is back on track

After a delay in 2021 due to social distancing, we are positive about developments at the Unitex factory in 2022F. STK is in the process of getting construction permit and completing the necessary legal procedures with the authorities. Phase 1 of Unitex factory will be put into commercial production from end-3Q23F, 2-month later than our previous forecast. We expect phase 1 of the Unitex factory to commercially operate at 30% capacity in 2023F with production volume of 10,800 tonnes, lifting sale volume to increase 20% yoy in FY23F.

Downgrade to Hold rating with lower TP of VND52,800/share

We downgrade to Hold rating with lower TP of VND52,800/share , following FY22-23F EPS of 3,685VND/share and 4,764VND/share, respectively with a P/E target of 12.5x, equivalent to one-year historical P/E. We downgrade to Hold as STK will face more challenges in short term . Upside catalyst is higher-than-expected sales volume of recycled and virgin yarn. Downside risk is stronger-than-expected input material price hike.

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