STK – On track for a robust FY21 earnings growth – Update

• STK’s 2Q21 revenue recorded VND510bn, +3.3% vs. 2Q19 and +102% yoy, while net profit soared 2.350% yoy and 33.9% vs. 2Q19.
• Reiterate ADD with higher TP of VND50,600 following FY21-22F earnings upgrade.

2Q21 performance returned to pre-pandemic levels

STK’s 2Q21 revenue recorded VND510bn, +3.3% vs. 2Q19 and +102% vs. low base 2Q20 when production disrupted for a few weeks during the first wave outbreak. Meanwhile, 2Q21 net profit (NP) soared 2,350% yoy and 33.9% vs. 2Q19, mainly driven by 1) larger contribution from higher-margin recycle yarn (55% of 2Q21 revenue vs 35% of 2Q20); 2) lower foreign exchange loss, and 3) lower corporate income tax. Overall, 1H21 revenue and NP achieved VND1,077bn (+26.5% yoy) and VND141bn (157% yoy), fulfilling 45.1% and 54.9% of our full-year forecast.

What makes us more confident in STK in 2H21-23F?

First, we expect recycled yarn revenue to surge 93% in FY21F and 19.4% CAGR over FY21-23F, thanks to growing demand from global clothing manufacturers. Second, STK aims to gradually expand its capacity to 99,000 tons/year by FY23F; and then 123,000 tons/years by FY25F in order to capture the growing demand for recycled yarn and high-quality yarn in FY23-30F. Last, we forecast US export revenue to accelerate 49.7%-60.6% yoy during FY22-23F, as STK is one of the US market exporters to enjoy the lowest anti-dumping tax rate of 2.67%. Consequently, we expect STK earnings to grow robustly 103.4% in FY21F and 26.3% CAGR over FY21-23F, much higher than our previous forecasts.

Still more upside from this point

STK’s stock price surged 109% ytd and currently is traded at 16.8x trailing P/E and 10.6x FY21F P/E, the highest valuation in its history. We still believe STK is deserved to be traded at a higher valuation thanks to its position as the country second-largest yarn manufacturer and its significant ROE improvement over FY21-23F. Thus, we lift our TP by 23.4% to VND50,600 following 1) an FY21-22F EPS upgrade of 13.6%/18.3%, and 2) a rollover to average FY21-22F EPS.

Investment risks

Firstly, social distancing in the Southern region may delay delivery time to STK’s customers in 2H21 as STK has only arranged for 70% of its workers to work and stay in its factories. Secondly, STK’s average liquidity and trading volume in the past one month only reached 116,000 and VND2.9bn per session. We expect STK stock liquidity to slightly improve as STK plan to issue an additional 13.6m shares at face value to existing shareholders in order to finance Unitex project in 1Q22.

Please follow this link for the full report