The author is an analyst for Shinhan Securities. He can be reached at bh.lee@shinhan.com -- Ed.
3Q23 review: Profits hit by weak GDR sales and high overseas SG&A
Golfzon posted consolidated sales of KRW170bn (-3.4% YoY) and operating profit of KRW27.5bn (-38.7% YoY) for 3Q23, missing our estimates by 10.9% and 28.9%, respectively. By division, sales from franchise came to KRW84.7bn (+20.4% YoY), non-franchise KRW27.3bn (+4.3% YoY), overseas KRW24.9bn (+4.3% YoY), and Golfzon Driving Range business KRW13.2bn (-62.9% YoY).
The GDR business performed poorly. A drop in hardware sales volume had been anticipated to a certain extent due to the declining popularity of golf. The deferred sales from certain clients added to its woe. In the domestic market, franchise sales exceeded our expectations (KRW72.9bn) and non-franchise sales came in line. The slowdown in overseas sales, the main culprit behind marketing spend hikes, was disappointing.
4Q23 outlook: Earnings to normalize in the new normal
For 4Q23, we forecast sales at KRW164.5bn (+16.4% YoY) and operating profit at KRW21.9bn (+194.7% YoY). Franchise sales should rise 15.6% YoY with promotion campaigns for the new TwoVision NX golf simulator. The GDR business will likely recover from the slump as sales deferred from 3Q23 will be booked in stages. Overseas sales are expected to jump 42.1% YoY. Factoring out one-off labor costs, like the ones seen in 4Q22, operating margin is projected to improve by 8%p YoY to 13.3%.
Golfzon’s performance in overseas markets will be important. Investors are wary about the golf industry after the pandemic. Earnings from domestic operations are unlikely to exceed market expectations with promotion campaigns for the new product and overseas operating expenses adding to costs. Domestic investments have a shorter payback period, but overseas investments take more time to produce results. With that in mind, we need to shift our focus from domestic to overseas operations, and from margin gains to growth in overseas markets.
Retain BUY and lower target price to KRW110,000
We retain BUY on Golfzon and lower our target price to KRW110,000, based on 2024F EPS of KRW16,495 and a target PER of 6.8x (past 4-year average PER low). The reasons behind the downgrade are: 1) downward revision of our earnings forecasts in view of the slowing growth in franchise and non- franchise sales, declining sales from the GDR business, and rising overseas operating expenses; and 2) our conservative approach (PER) until visible results are seen in overseas markets. Shares are nearing historical PER lows. We believe an upturn in the share price will hinge on overseas growth