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Reflecting the impact of Covid-19 on LG Innotek’s earnings, we downwardly adjust 2020E EPS and our target P/E, in turn lowering our TP. We have cut our earnings estimates in light of likely: 1) slower demand for a North American client’s smartphones; and 2) delays in new smartphone model releases slated for 2H20. Despite these adjustments, we believe that LGI’s shares remain attractive at their current price.
Share price attractive despite lowered earnings estimates
Although lowering our TP on LG Innotek (LGI) from W200,000 to W160,000, we adhere to a Buy rating. Our new TP reflects both an 18.6% cut to 2020E EPS and a 10% reduction in our target P/E to 17x (vs previous estimate of 19x). We have cut our earnings forecasts in light of likely: 1) reduced demand for a North American client’s smartphones; and 2) delays in new smartphone model releases slated for 2H20.
But, we maintain a Buy rating, noting that: 1) despite lowered earnings estimates, LGI’s shares are currently trading at a 2020E P/E of 12.2x, offering a 40% discount to the figure for global peers (ie, camera-related plays); and 2) the company’s mid/long-term earnings are expected to benefit from increasing specs for camera components (such as the offering of optical zoom and ToF 3D sensors).
We downwardly adjust our 2020 sales forecast by 11.8% to W8,296.7bn (-0.1% y-y) and our OP estimate by 17.2% to W401.4bn (-0.4% y-y; OPM of 4.8%)— figures that are beneath the present consensus by 9% and 23.6%, respectively. The main reason underlying the adjustments to our annual earnings estimates is a 22.2% cut (208mn units → 161.3mn units) in our 2020 forecast for smartphone shipments at LGI’s North American client.
1Q20 earnings to prove better than expected, but expect operating loss in 2Q20
Looking at quarterly earnings, LGI should post stronger-than-expected earnings for 1Q20 in response to a recently more favorable dollar/won rate. But, the firm will likely see operating losses in 2Q20 due to inventory adjustments (stemming from a slump in sales at its North American client). While we expect LGI’s earnings to rebound in 3Q20 in response to new smartphone effects, the level of this likely recovery is to hinge upon the timing of new model releases. As there is a high possibility that the release dates for new smartphone models will be pushed back, LGI’s 2020 earnings will likely disappoint current market expectations. That said, we advise focusing upon anticipated mid/long-term earnings growth and valuation merit rather than short-term earnings.