The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
Dong-A ST’s 1Q20 earnings are expected to show y-y improvement, thanks to supply expansion prior to enforcement of the MFDS’s order to suspend business operations (March-May). However, we anticipate conservative earnings from 2Q20, when the effects of business suspension and Covid-19 should begin to be felt in earnest. Viewing Dong-A ST’s recent share price drop (YTD -32%) as excessive, we recommend increasing exposure from a mid/long-term perspective.
Despite conservative earnings estimates, shares currently trading at 2020E P/E of 17.9x
We lower our TP on Dong-A ST from W130,000 to W95,000. While the firm is expected to report solid 1Q20 earnings on supply expansion ahead of a suspension in business operations, its 2Q20 earnings will likely arrive sluggish due to a resultant gap in sales and the negative effects of Covid-19. Downwardly adjusting 2020E EPS by 11.6%, we slash our target multiple from 25.9x to 21.2x due to an absence of milestone momentum. We estimate Dong-A ST’s operating value at W805.6bn by applying a target P/E of 21.2x (a 10% discount to the average P/E of Yuhan, GC Pharma, and CKD) to 2020E NP of W38.1bn. In our view, concerns over both the three-month suspension of business (an administrative measure by the Ministry of Food and Drug Safety (MFDS), which was disclosed on Feb 20) and the deteriorating macro environment have led to excessive share price decline. Believing that the shares offer ample upside potential, we maintain a Buy rating.
1Q20 preview: OP to exceed consensus by 171.3%
On a non-consolidated basis, we size Dong-A ST’s 1Q20 sales at W176.5bn (+23.8% y-y) and OP at W41.0bn (+99.8% y-y; OPM of 23.2%), with sales and OP surpassing consensus by 13.2% and 171.3%, respectively. Our rosy projections are mainly attributable to expectations for: 1) supply expansion prior to the three-month business suspension handed down by the MFDS; 2) increased prescription of Gaster (gastric ulcer) following the Ranitidine crisis; and 3) reduced SG&A expense on a Covid-19-related contraction in business activities. Helped by favorable forex-rate effects, exports are estimated at W35.1bn (+9.2% y-y). Meanwhile, the medical device division likely registered sluggish sales of W16.0bn (-11.9% y-y) on a decline in surgeries. Having launched in Japan in 4Q19, DA-3880 (Aranesp biosimilar, partner SKK) has now begun generating revenue. Phase I trials of DA-5207 (dementia) kicked off in India in 1Q20. Results of US phase 1b trials for DA-1241 (diabetes) should be announced in 3Q20, and Suganon looks set for launch in Russia in 4Q20. However, considering uncertainties towards pre-clinical completion of DA-4501 (MerTK inhibitor), potential milestone income from Abbvie has been removed from our estimates. We forecast 2020 sales of W613.7bn (+0.2% y-y) and OP of W47.8bn (-16.1% y-y).
NH Investment & Securities