STK – Growth intact despite more headwinds arise – Update

• 1Q22 revenue and net profit grew modestly 12.9% yoy and 8.8% yoy, respectively, below our full year forecasts.
• We revise down FY22F/23F net profit forecast by 6.9%/16.9% due to lower-than-our-expectation 1Q22 results.
• We reiterate ADD but revise TP down to VND68,200/share.

1Q22 earnings growth to cool down
STK posted 1Q22 revenue of VND640bn (+12.9% yoy) and net profit of VND76.3bn (+8.8% yoy). The 1Q22 performance was below our expectation as (1) STK refused to accept more orders of recycled yarn due to the high price of input materials and 2) gross margin edged down 2.3% pts to 17.5% following the Polyetylen (PE) chip price hike.
More headwinds arise
We see more headwinds arising from input material price hike and new entry competitors. PE chip price, accounting for 60% of cost of goods sold, soared 18% yoy in 1Q22 following the surge of oil price. We expect the average PE chip price to reach VND28,309/kg (+10.8% yoy) in 2022 and VND27,459/kg (-3% yoy) in 2023. Besides, Polytex Far Eastern Vietnam Ltd, a Taiwanese yarn manufacturer, will relocate the yarn factory to Vietnam with a capacity of 60,000 tonnes/year in 2022. Far Eastern will be the third recycled yarn player in Vietnam with aim to deliver for Taiwanese textile & garment producers. Thus, we believe the competition in local market is heating up as the size of Far Eastern factory is same with STK.
Changes to FY22-23F earnings forecasts
We lower FY22/23F recycled yarn revenue by 17.5%/9.1% versus previous forecasts due to (1) lower-than-our-expectation 1Q22 results and rising competition pressure from the new comers; (2) the Unitex factory will inaugurate in 2Q23F, 3 months later than initial plan. We made a downward adjustment by 0.4%/0.5% pts on FY22/23F GM following 8%/6% higher in PE chip prices. Thus, FY22/23F net profit are revised down 6.9%/16.9%, respectively, vs. previous forecasts. However, earnings growth stays intact at 28% average over FY22-23F, which is higher than the average of 91% during FY20-21.
Re-iterate Add rating with lower TP of VND68,200/share
We revise down our TP by 5.6% following an FY22-23F EPS downgrade of 6.9%/16.9%, respectively. STK’s share price has dropped 14% since 15-Apr following overall market slump. We think STK is still a stock pick in exporting space with strong earnings growth of 28% over FY22-23F. Upside catalyst is higher-than-expected sales volume of recycled and virgin yarn. Downside risk includes stronger-than-expected input material price hike.

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