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1Q20 results likely short of consensus at sales of KRW70.1bn and OP of KRW6bn
Innox Advanced Materials is now expected to post sales of KRW70.1bn (-18.2% YoY, -18.3% QoQ) and operating profit of KRW6bn (-49.7% YoY, -46.3% QoQ) for 1Q20, missing consensus estimates of KRW75.4bn in sales and KRW7.8bn in operating profit. We believe earnings were hit by COVID-19 pandemic-driven slowdown in market demand for major client industries such as high-end smartphones and OLED TVs. On a positive note, earnings from small/mid-size OLED and semiconductor materials were likely solid.
Sharp rebound expected upon recovery in market demand for IT devices
For full-year 2020, we forecast sales at KRW341.8bn (-2.2% YoY) and operating profit at KRW37.6bn (-19.0% YoY). Earnings improvement should hinge on the extent of recovery in market demand for IT devices. Key variables in demand for materials by application are: 1) capacity utilization rates of major client companies for OLED TVs; 2) new product (foldable and 5G models) demand for high-end smartphones; 3) IT and handset market conditions for general-purpose FPCBs; and 4) memory market conditions for semiconductors. All in all, we believe earnings momentum is unlikely to emerge before 2H20 and maintain a conservative outlook given uncertainties in the extent of the upturn in demand for IT devices. However, we expect earnings to sharply improve upon containment of the pandemic and recovery in IT demand from 2H20.
Further downside risk in share price seen limited
In reflection of down-adjusted earnings forecasts on uncertainties in client demand, our target price is lowered to KRW43,000 based on 2020F EPS and a target PER of 13.6x (20% discount to 2017-2019 average PER). With mid/long-term growth momentum still seen intact, we maintain our BUY rating for Innox Advanced Materials. The company's financials have visibly improved with cash assets reaching KRW53bn as of end-2019. Further downside risks are seen limited with shares now trading at historical low valuations. We expect an upturn in share price upon recovery in demand for IT devices.