The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. -- Ed.
Based on the increased number of home-shopping airings for HLscience’s Dr. Green Propolis this month, we expect the firm to log robust 1Q20 earnings. Last year’s flagship product, Sprout Barley, continues to sell well, and sales of its high-growth lactic acid bacteria offering are on the rise thanks to greater demand for immunity-related products.
Covid-19 boosting demand for immunity-related products
This year, HLscience’s flagship lineup is being reorganized towards immunity-related products. While the company’s existing flagship products are all pomegranate-focused, this year, sales of Dr. Green Propolis, Sprout Barley, and Dr. Prebiotics have proved particularly solid. Of note, the number of airings for Dr. Green Propolis on home-shopping channels has climbed to nine thus far in March (vs one in January and four in February).
Given average sales of W400mn per airing for Dr. Green Propolis, we estimate related 1Q20 sales at around W6bn—roughly 18% of the firm’s overall 1Q20E sales. Backed by the addition of new products this year to its flagship lineup, the firm looks set to enjoy solid 2020 earnings growth.
HLscience is diversifying its sales channels from the home-shopping arena to the online domain, with plans to launch two new products in 2H20. Noting that recent dietary food trends are expanding to include not only immunity-related products but also antibacterial products (eg, Dr. Green Propolis), we advise paying attention to HLscience’s strategic response.
Current P/E of less than 10x represents remarkable undervaluation
We forecast HLscience’s 1Q20 sales at W34.0bn (+39.2% y-y) and OP at W6.0bn (+9.4% y-y). Despite the impact of Covid-19, the dietary food business environment looks healthy. We also believe it is worth noting that: 1) immunity-related and antibacterial offerings are emerging as new flagship products; and 2) its sales channels (eg, home shopping) are non-customer facing. In contrast to the situation for most other consumer goods plays, it is expected that positive effects of the Covid-19 outbreak will outweigh associated negatives for the firm.
Caught in the recent market plunge, HLscience’s shares are currently trading under a 2020E P/E of 10x. Considering both its product lineups and sales channels, we believe that the company’s share price represents a significant undervaluation compared to its fundamentals.