STK to benefit from the trend of green fashion

STK has benefited from the trend of green fashion

At the end of the first 6 months of 2021, the net revenue of STK was VND 1,077 billion (24% YoY), completing 45.7% of the 2021 target, thanks to the recovery in the number of orders. Meanwhile, net profit increased by 157% YoY to VND141 billion thanks to increasing the proportion of recycled yarn with a high gross margin and benefiting from improved yarn prices in 1H 2021. 

Revenue from recycled yarn is the growth driver, accounting for 56.48% of net revenue in 1H 2021, equivalent to VND 608 billion (100% YoY) thanks to the company's orientation to developing recycled yarn and the rising demand for recycled yarn of major brands.

PHS said the strategy to develop recycled yarn creates long-term growth momentum. Major fashion brands have shifted to environmental-friendly products with outstanding features. This trend created a rising demand for recycled yarn. As the profit margin of the virgin yarn segment shrank, STK plans to reduce the proportion of virgin yarn and raise the proportion of recycled yarn to 100% of revenue by 2025, creating growth momentum for the Company.

The Yarn – Fabrics – Textiles project enhances chances of the Company benefitting indirectly from CPTPP. STK established an alliance with textile and sewing partners. The textile company started the construction in 2020. STK will start to construct the factory in 2021. To benefit from CPTPP, domestic companies have to meet the requirements of rules of origin. CPTPP requires that all processes from yarn onwards should be performed by CPTPP member countries. Hence, firms will tend to give priority to domestically produced yarn. Moreover, the State has the policy to develop a domestic supply chain, so many textile projects will be developed in the future.

The project of Unitex Synthetic Fiber Factory would help STK stay ahead of the green fashion trend. The new factory in Tay Ninh with a total capacity of 60,000 tons per year, as twice as the current capacity, would be built in 2 phases (phase 1: 36,000 tons per year, phase 2: 24,000 tons per year). In 2023, the factory in phase 1 will be put into operations and start its phase 2 construction. Phase 2 would be finished in 2025. The factory will focus on the production of recycled yarn, high-quality yarn, and specialty yarn. The factory with a capacity of 60,000 tons per year would be the engine for revenue growth in the future. PHS projects net revenue would soar 38% in 2023 to VND 3,066 billion, and achieve a CAGR of 17% over the period 2021-2025.

However, PHS said, the greatest risk of STK is the raw material. Additionally, the company also has faced risks from Covid-19; risks from the review of anti-dumping tax; FX risks.

By using DCF and EV/EBITDA, PHS estimated the fair price of STK shares is about VND 45,300 per share (8% compared to the current price). Hence, it recommends “hold” for this stock.