S-1 Corp.: Drop in Net Subscriber Growth Unavoidable

The author is an analyst of NH Investment & Securities. He can be reached at kpark37@nhqv.com. -- Ed.

S-1 Corp.: Drop in net subscriber growth unavoidable; mid/long-term earnings growth still valid

Amid the Covid-19 crisis, S-1 Corp is inevitably facing a slowing in net subscriber growth. But, expectations towards mid/long-term earnings growth remain valid in light of: 1) ongoing efforts to sign MOU contracts with a variety of new firms; 2) sound capex investment at Samsung Group affiliates; and 3) an anticipated hike in the number of clients installing CLES.

Covid-19 impact unavoidable, but focus on stable business structure

S-1 Corp should see consolidated 2020 sales of W2,203.3bn (+2.4% y-y) and OP of W204.0bn (OPM of 9.3%). Taking a conservative stance due to the harsh business landscape created by Covid-19, we revise down our earnings forecasts. Applying a target P/E of 24x, we lower our TP from W116,000 to W98,000.

Due to Covid-19, S-1 Corp’s net subscriber growth is to slow this year. But, the pace of growth should recover rapidly once the crisis passes. Moving ahead, we believe that the firm will continue to steadily push up its subscriber numbers by: 1) keeping previous subscribers; and 2) making further efforts to sign MOU contracts with a variety of different firms. Also, the product sales business should show revenue growth on: 1) likely solid capex investment by Samsung Group affiliates (captive clients); and 2) increased CLES (facial recognition system) and thermal imaging camera installations amid the Covid-19 pandemic. Meanwhile, non-captive order volume will likely continue to rise at the building management business, led by stake investment in REITs in line with the expansion of the consigned-management REITs market. Also positive, S-1 Corp is free of financial risk, possessing net cash of around W430bn.

Covid-19 impact unavoidable: Net subscriber growth likely slowed in 1Q20

We expect S-1 Corp to register consolidated 1Q20 sales of W504.1bn (+2.8% y-y) and OP of W44.2bn (-3.9% y-y), with both figures missing consensus.

Likely unable to avoid the impacts of Covid-19, we believe that net subscriber growth at S1 Corp’s alarm security business slowed (1Q20E: outstanding subscribers of 806,856 (+0.7% q-q); sales of W268.2bn (+2.9% y-y)). Despite low seasonality and a delay in security installations at overseas projects, the product sales business should record 1Q20 sales of W59.4bn (+1.6% y-y), led by favorable sales of other products (including CLES and thermal imaging camera offerings). Helped by an overall expansion in office floor area in Korea, we believe that the building management business will register 1Q20 sales of W127.4bn (+2.3% y-y).