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STK – First take on 1Q24 results – tough time

• In the first quarter of 2024, earnings results are expected to reflect a sluggish recovery in the first half of the year. We forecast that the net revenue and NPAT-MI of STK will approximately reach VND 300 bn (-14.8% QoQ, +4.2% YoY; USD 12 mn) and VND 4 bn (-87.3% QoQ, +145.6% YoY; USD 0.16 mn) in Q1, under the assumptions that (1) the overall yarn production will be around 5.7 thousand tons (+7.5% YoY), of which recycled yarn will account for about 58% of revenue (+1% YoY), and (2) there will be a slight decrease in the average selling price (ASP).
• For the year 2024, we maintain our viewpoint that STK's recovery pace will decelerate, with the primary recovery occurring in the latter half. We project that the net revenue and NPAT-MI of STK will reach VND 1,979 bn (+38.8% YoY; USD 81 mn) and VND 154 bn (+76% YoY; USD 6 mn), respectively, based on assumptions that (1) the total yarn production will return to growth, increasing by 36% YoY (assuming that the two existing factories will operate at an ultilization rate of 60% and Unitex, starting its operations in Q4, will run at about 10% capacity); (2) the share of recycled yarn will account for approximately 51% of total revenue; and (3) interest expenses are expected to increase by VND 39 bn and depreciation expenses by VND 30 bn as the Unitex factory commences operations in Q4/2023. The corresponding EPS is VND 1,640 per share.
• We have adjusted the target price to VND 29,000 per share (up from VND 26,200 per share) as we reassess the earnings outlook for the 2025–2028 period. Currently, we believe that expectations for a rapid and strong recovery in order volume have already been reflected in the stock price. Therefore, we have downgraded our recommendation from NEUTRAL to REDUCE for STK.