The author is an analyst for NH Investment & Securities. He can be reached at jooyh@nhqv.com -- Ed.
Amid the process of Lotte Rental expanding its used car rental business, its used car sales volume has decreased. But, its sales and OP growth should sustain in 2024 on both export expansion and brand renewal effects.
Expect 2024 OP of W344.8bn (+10% y-y)
We maintain a Buy rating and a TP of W40,000 on Lotte Rental.
On a consolidated basis, we foresee 2024 sales of W2.86tn (+3.5% y-y) and OP of W344.8bn (+10.3% y-y). The company is seeking to expand its business model through its used car rental business. In the process, it will likely experience a temporary earnings slowdown due to decreased used car sales volume. Nevertheless, a double-digit increase in annual OP should be possible next year through an expansion of the company’s used car exports via the establishment of a specialized used car purchasing organization.
As the average used car rental contract period is 24 months, consolidated OP is expected to climb sharply from 2025 once sales gains come to be reflected in earnest following the end of the contract period (guidance target: 2025F OP of W490bn). Considering the strengthening of its competitiveness in the ultra-short-term rental car market thanks to the acquisition of additional shares in Socar (car-sharing business), we believe that Lotte Rental has secured mid/long-term growth engines.
4Q23 preview: Used car sales volume down y-y
We estimate consolidated 4Q23 sales of W666.9bn (-3% y-y) and OP of W60.5bn (-6% y-y), with OP growth to be dampened by a decrease (y-y) in used car sales volume amid the expansion of the used car rental business. But, with its rental car business fundamentals remaining intact, the firm’s earnings momentum should pick up on low-base effects in 2H24 from this year’s decline in used car sales volume. With its DY approaching 4.5% based on its current share price, Lotte Rental is appealing both in terms of dividends and valuations.