Innocean Worldwide
The author is an analyst for NH Investment & Securities. She can be reached at hzl.lee@nhqv.com -- Ed.
Innocean delivered a 1Q23 earnings shock. Despite unfavorable market conditions, captive client-driven top-line growth continues, but annual profitability decline looks unavoidable due to continued aggressive investment into new businesses. We lower our TP to W55,000.
Profitability burden overwhelms strengths from large captive clients
We lower our TP on Innocean Worldwide (Innocean) by 11% from W62,000 to W55,000. Although top-line growth is expected to slow due to unfavorable industry conditions, it is encouraging that revenue can be defended through stable captive orders (new car marketing and resumption of motor shows). However, the firm still has plans to aggressively expand its new businesses (eg, by acquiring a media rep in 1H23). As a decline in annual profitability looks unavoidable given the steep rise in costs relative to sluggish top-line growth, we downwardly adjust our earnings estimates.
Appealing from long-term perspective
We maintain a Buy rating on Innocean, believing that concerns over the impact of economic slowdown on the ad industry have already been fully reflected in the share price. Even based on drastically lowered earnings forecasts, the current 2023E P/E is 12.6x, at the bottom of the band chart. In addition, we see clear dividend appeal (DY of 5.0%). Considering the company’s ongoing mid/long-term investment into new businesses, a long-term approach should be effective.
1Q23 review: Earnings shock due to heavy SG&A expenses
Innocean announced consolidated 1Q23 GP of W177.1bn (+8% y-y) and OP of W19.2bn (-24% y-y), with OP missing the lowered consensus.
HQ: Operating loss of W3.8bn (TTL y-y). Despite top-line growth driven by captive agency effects (new car (Kona) and motor shows), rising SG&A expenses (manpower increase and ERP introduction) sapped earnings.
Overseas: OP of W22.9bn (+7% y-y). Top-line growth was solid, driven by favorable forex rate effects and captive agency benefits (new car (Ioniq 6)) in the Americas, but non-captive sales were relatively sluggish.