Cosmetics Business Keeps Growing
The authors are analysts of Shinhan Investment Corp. They can be reached at jwsung79@shinhan.com and hanny.lee@shinhan.com, respectively. -- Ed.
Initiate coverage with BUY and target price of KRW1,600,000
We initiate coverage of LG Household & Health Care with a BUY rating and a target price of KRW1,600,000, based on 12-month forward EPS of KRW48,952 and a target PER of 33x. Our target PER is the past six-year average recorded during growth of China-bound sales to reflect the steady rise in demand for the company’s brands, despite a temporary slowdown in market conditions amid the COVID-19 pandemic. Cosmetics demand will likely weaken slightly in 1H20, but strengthen in 2H20 with added boost from pent-up demand. Strong demand for hand sanitizers/soaps, masks and hygiene items should drive additional growth. Beverage demand is forecast to remain steady or climb slightly. We recommend accumulating the stock in view of post-pandemic demand growth at duty-free shops (small-scale merchants) and China’s online channels.
Focusing on growth based on stable business portfolio
LG Household & Health Care operates three main businesses, which are: 1) cosmetics, the core business with high growth potential; 2) household goods, the company’s original business; and 3) beverages, the source of stable cash flows. The company generates about 40% of sales from household goods (20% as of 2019) and beverages (19%). It has seen stable sales from Coca Cola, bottled water, and other beverages.
Cosmetics represent 61% of total sales as of 2019. The biggest contribution among the sales channels comes from duty-free shops, making up 39% of cosmetics sales and 63% of profit. The company stands to benefit greatly once the duty-free channel starts to recover in 2Q or 3Q. Based on stable cash flows, it has expanded its cosmetics business by acquiring CNP Cosmetics, Taiguk Pharma, Avon Japan, and Physiogel’s business rights in Asia and North America. Further re-rating of shares is expected through growth in cosmetics business.
2020 consolidated OP forecast at KRW1.07tr (-9.1% YoY)
For 2020, we forecast consolidated sales of KRW7.61tr (-1.0% YoY) and operating profit of KRW1.07tr (-9.1% YoY). Sales should remain unaffected by the COVID-19 pandemic. Operating profit from cosmetics is projected at KRW776.9bn (-13.5% YoY), household goods KRW133.2bn (+5.7% YoY), and beverages KRW158.8bn (+4.1% YoY). Cosmetics operating profit will highly likely decline YoY in 1H20 and grow in 2H20. Quarterly earnings from household goods and beverages should continue on a steady uptrend. By quarter, consolidated operating profit is estimated at KRW241.8bn (-24.9% YoY) for 1Q, KRW227.6bn (-24.5% YoY) for 2Q, KRW332.2bn (+6.5% YoY) for 3Q, and KRW267.3bn (+10.9% YoY) for 4Q.