Benefiting from COVID-19 Outbreak

The author is an analyst of Shinhan Investment Corp. He can be reached at sejonghong@shinhan.com. -- Ed.

 

1Q20 OP to come in at KRW1.7bn (+19.4% YoY)

We now expect Foodnamoo to post consolidated sales of KRW20.3bn (+38.7% YoY) and operating profit of KRW1.7bn (+19.4% YoY) for 1Q20, with the top-line growth estimate raised sharply from our previous forecast of 30.2% YoY. The company is benefiting from the COVID-19 outbreak-driven expansion of domestic e-commerce, and investments for further growth are continuing in step with rapidly changing market conditions. Advertising spend likely reached up to KRW2.5bn in 1Q20 vs. KRW1bn in 1Q19. Steep top-line growth is leading to improvement in cost ratios, and operating profit should start to exceed KRW2bn levels from 2Q20.

2020 top-line growth to reach 34.2% YoY even on a conservative view

For full-year 2020, we forecast sales at KRW86.9bn (+34.2% YoY) and operating profit at KRW8.7bn (+59.2% YoY). Our projections are based on a strictly conservative view. If market conditions remain favorable, we believe domestic sales could even rise above KRW90bn. Ad spend in 1H20 will likely exceed initial expectations, but impact on earnings should be partly offset by the improvement in cost ratios. Once SG&A ratio starts to improve, we expect profit growth to reach near 70% levels going forward.

Meanwhile, China holds the key to growth in exports. Once the pandemic dies down, Foodnamoo’s partnership with Wing Yip Food should promptly resume. Sales will start to flow in upon completion of production line installations and sales approval processes. Although difficult to forecast actual earnings at this point, we expect to see significant share price momentum with rising health awareness in China to add a boost to growth.

Maintain BUY and raise target price to KRW26,000

We raise our target price to KRW26,000,based on 2020F EPS and a target PER of 24x in reflection of faster-than-expected top-line growth. Our rating is unchanged at BUY in view of:1) solid market power backed by rankingdak.com’s unrivalled member count; 2) operating profit growth driven by base effect; and 3) accelerating shift to e-commerce fueled by the pandemic. Currently trading at a 2020F PER near19x, shares have ample upside given the company's net cash holdings of KRW40bn.

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