Cosmetics Division Growing Despite Recession
The author is an analyst of NH Investment & Securities. He can be reached at william.ku@nhqv.com. -- Ed.
Despite the Covid-19 crisis, we expect Dongkook Pharm’s pharmaceutical business to maintain positive sales growth. Focusing on home-shopping channels, the cosmetics division should see ongoing rapid sales growth as well. Viewing Dongkook Pharm as undervalued from a mid/long-term perspective, we recommend paying attention to the play.
Even if estimating conservatively, 12-month forward P/E sits at just 9.0x
Despite lowering our TP on Dongkook Pharm from W115,000 to W90,000, we maintain a Buy rating. Our TP was derived by applying a target P/E of 12.8x to 2020E NP (excluding minority interests) of W63.2bn. As sales growth at the pharmaceutical business has slowed somewhat due to the outbreak of Covid-19, we have applied a 15% discount to our previous target P/E multiple. In contrast to the ethical drugs and OTC divisions, however, the cosmetics division is forecast to enjoy 1Q20 sales growth in excess of 15% alongside strong earnings growth visibility—positives that we attribute to an increased portion of home-shopping sales and channel diversification effects (eg, supply to Olive Young). Currently trading at a 12-month forward P/E of 9.0x, Dongkook Pharm’s shares boast valuation appeal, in our view.
Cosmetics division growing despite recession
On a consolidated basis, Dongkook Pharm is projected to log 1Q20 sales of W111.7bn (+1.1% y-y) and OP of W14.9bn (+2.9% y-y; OPM of 13.4%). Due to the strength of its past earnings growth, it will be difficult for the firm to meet investor expectations in the near term; nevertheless, we believe that the ethical drugs and OTC divisions will continue to show healthy earnings improvement on strong sales up to February (prior to the full-fledged impact of Covid-19). Buoyed by new product effects and sales organization improvement, 1Q20 sales at the ethical drugs division should reach W28.3bn (+12.0% y-y). We estimate OTC division sales at W31.1bn (+12.0% y-y), considering the release of new product Minetrol (lethargy) against a backdrop of solidly performing existing brand items. In 2019, the cosmetics division recorded its strongest sales ever (W83.1bn, +57.4% y-y). We expect 1Q20 cosmetics sales to climb to W19.8bn (+20.0% y-y) on the back of robust home-shopping channel growth since the outbreak of Covid-19. However, due to a decrease in health functional food sales at the department store channel, healthcare division sales are forecasted at W32.9bn (+3.1% y-y). Meanwhile, although SG&A expense is likely to drop by W3.0bn q-q on marketing cost control efforts, associated costs will likely expand in 2H20 alongside anticipated sales growth. We estimate Dongkook Pharm’s 2020 annual sales at W499.8bn (+3.6% y-y) and OP at W74.9bn (+9.2% y-y; OPM of 15.0%). Our 2020 EPS estimate is downwardly adjusted by 6.5%.