Kyungbang Emerges as New Major Shareholder
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com. -- Ed.
Kyungbang has emerged as Hanjin Transportation Co.’s new major shareholder. Believing that the disposal process for non-operating assets and non-core businesses will accelerate, we expect the company’s valuation discount factors to fade. Hidden value can be created in the process of reassessing assets (such as the firm’s parcel and stevedoring businesses).
Arrival of new major shareholder leads to reduced valuation discount factors and expectations for creation of hidden value
Maintaining a Buy rating, we raise our TP on Hanjin from W42,000 to W53,000 owing to: 1) upwards earnings revisions led by robust parcel deliveries; and 2) the higher possibility of asset disposals. Our RIM-derived TP assumes a risk-free rate of 1.5% and market risk premium of 7.0%.
High interest expenses due to excessive borrowings have acted as a discount factor for Hanjin’s valuations of late. As a result, despite earnings improvement at the parcel delivery business, net asset value has been slow to improve due to high interest expense. In order to reduce borrowings, it is necessary to sell non-operating assets and non-core businesses, but the firm’s progress has been minimal. That said, the sale of such assets is expected to accelerate with Kyungbang emerging as a new major shareholder on Apr 9.
If KCGI’s ownership in Hanjin Kal expands and Kyungbang’s ownership in Hanjin expands, the possibility of selling major business divisions such as the parcel and stevedoring businesses will increase. Accordingly, it is necessary to re-evaluate the business assets held by Hanjin as it is possible that hidden value of its assets will be highlighted in the disposal process. If such assumptions are realized, the company’s EV could rise to W66,286 per share.
Annual earnings improvement driven by parcel business
We expect Hanjin to book 1Q20 sales of W533.8bn (+12.3% y-y) and OP of W23.8bn (+29.7% y-y; OPM: 4.5%).
Total volume in the parcel delivery market increased 18% y-y in 1Q20 amid the Covid-19 pandemic, and Hanjin’s delivery volume growth likely exceeded the market growth with a figure of 24% y-y amid the expanding M/Ss of the Big 3 (CJL, Hanjin, and Lotte). We believe favorable earnings at Hanjin’s parcel delivery business made up for sluggish earnings at the global express and land transportation businesses.