KT&G
The author is an analyst of NH Investment & Securities. He can be reached at jooyh@nhqv.com -- Ed.
We lower our TP on KT&G to W110,000 to reflect adjustments to our earnings estimates. However, considering the chances of expanded shareholder return policy, we view KT&G as an attractive defensive play.
Lower TP to W110,000
We lower our TP for KT&G by 4.3% to W110,000. Our TP was calculated by applying a P/E of 14.5x (Japan Tobacco and PMI average) to 12-month forward NP (excluding minority interest).
We trim our earnings estimates to reflect: 1) a slide in real estate business earnings following the completion of the Suwon project; and 2) a dip in margins, owing to rising manufacturing costs. However, cigarette sales remain stable, and it is judged that growth potential has been secured for the overseas business via the signing of a long-term contract with PMI to sell e-cigarette devices and consumables to the global market over the next 15 years.
As the articles of incorporation related to quarterly dividends were changed at the general shareholders’ meeting at end-March, quarterly dividends will likely be paid out from this year. We maintain a Buy rating, as expanded shareholder return policy (eg, cancellation of treasury stocks) is expected.
1Q23 preview: Burdened by rising cigarette manufacturing costs
We expect KT&G to post consolidated 1Q23 sales of W1.4tn (-1% y-y) and OP of W291.9bn (-12% y-y), with both figures to miss consensus. We mainly attribute the likely sluggishness to increased cost burden stemming from higher raw material prices and the end of the Suwon real estate project.
Domestic tobacco sales likely climbed 1.8% y-y. While cigarette sales likely fell slightly, HNB (e-cigarette) penetration remains on the rise. As of 1Q23, the firm’s share of the domestic e-cigarette market is estimated to have topped 49%. Brisk growth is forecast to continue for both exports and overseas subsidiaries.
Sales at KGC should arrive solid. Although sales likely slid a little (y-y) due to the difference in the timing of the Lunar New Year, OP should evidence significant improvement to W42.3bn (+24% y-y) on strengthened earnings at the Chinese subsidiary and reduced marketing expenses.