COVID-19 Effects Blessing in Disguise
The author is an analyst of NH Investment & Securities. He can be reached at mj27@nhqv.com. -- Ed.
Thanks to more rapid production normalization and stronger channel portfolio competitiveness relative to competitors, Orion achieved better-than-expected March results following a strong February. From 2Q20, we expect Orion to strengthen its dominance via aggressive product launches and quality-control efforts.
Raise TP by 11%
Adhering to a Buy rating, we raise our TP on Orion by 11% from W135,000 to W150,000 in light of a 9% and 6% hike in 2020E and 2021F EPS, respectively. We note that Orion’s competitiveness in production and distribution relative to competitors has enabled it to recover relatively rapidly from the impact of the Covid-19 pandemic. Accordingly, we expect the firm’s overall sales and M/S to increase going forward. While its share price has recently climbed, considering its fundamental improvement, we believe that Orion continues to remain undervalued compared to global peers.
Covid-19 effects blessing in disguise; M/S continuing rise
From 2Q20, we believe that Orion will aggressively launch new products that have faced delays, expand its M/S, and strengthen its market dominance. We note that competitors have recently launched production and distribution channel maintenance efforts in order to address the damage due to the Covid-19 outbreak. In the meantime, such firms are responding to market demand with existing inventory—a factor that should make earnings normalization difficult due to inventory exhaustion effects. Considering the Orion’s product and brand power, it will likely prove challenging for competitors to eat into its M/S once it takes a dominant role.
Logged better-than-expected 1Q20 results
Based on Orion’s monthly announcements, we arrive at 1Q20 sales and OP figures (preliminary basis; simple sums of tentative January-March results) of W543.7bn and W96.9bn, respectively. In 1Q20, the Chinese subsidiary achieved y-y sales growth, despite differences in the timing of the Lunar New Year and extension of the holiday period. Thanks to sales growth centering on existing products, OPM improvement was also noticeable. Looking at the firm’s domestic subsidiary, sales continued to climb on robust new product sales and high online sales growth thanks to a relatively large portfolio of snack and pie items versus competitors. Of note, the snack and pie markets are seeing relatively rapid growth compared to that for other product markets. Meanwhile, Orion’s Vietnamese and Russian subsidiaries enjoyed ongoing strong earnings growth on healthy sales of both existing and new products.