Despite Better Shareholder Value
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com -- Ed.
LG International’s earnings for 1Q20 came in above consensus. But, concerns are in play towards likley earnings decreases from 2Q20 at LGI’s industrial materials and logistics arms due to the Covid-19 crisis. We positively view the firm’s recently-started large-scale treasury shares buyback program, but in order for investment sentiment to improve, coal prices will need to rebound and the firm will need to outline specific plans for a potential Pantos IPO.
Earnings visibility lessens amid Covid-19 crisis
In response to a weakening in its share price due to slow earnings, LG International (LGI) has recently disposed of an idle asset and started a large-scale treasury shares buyback program (Apr~Dec 2020; value of W100bn; 20% of current market cap). But, with its business portfolio concentrated on trading, logistics, and energy, earnings visibility is to lessen moving forward on: 1) reduced trade volume due to Covid-19; and 2) greater energy price volatility.
Adhering to a Hold rating, we lower our TP on LGI from W19,600 to W14,900, reflecting: 1) downward adjustments to our earnings estimates in light of the spread of Covid-19; and 2) a change in our target discount rate (20 → 40%). Essential prequisites for investment sentiment improvement are to be: 1) earnings improvement at the energy business upon a turnaround in the coal price; and 2) the outlining of specific plans for a potential Pantos IPO.
1Q20 review: Earnings top consensus
LGI announced consensus-beating results for 1Q20, posting consolidated sales of W2,449.8bn (-4% y-y) and OP of W49.9bn (-6% y-y). Pre-tax profit proved favorable (W374.5bn, +660% y-y), led by disposal gains stemming from the firm’s sale of its stake in Beijing Twin Tower.
The logistics division booked OP of W37.0bn (+22% y-y), with its OPM widening to 3.5% on: 1) an urgent temporary rise in volume amid the Covid-19 pandemic; and 2) improved warehouse logistics margins. Influenced by both product price drops (stemming from the Covid-19 outbreak) and decreased trading volume, the industrial materials/solution division booked tepid OP of W7.9bn (-36% y-y). Despite rising production at the GAM Coal Mine, OP at the energy/palm oil business slid to W5.0bn (-53% y-y) due to ongoing weak coal prices (1Q20 Indonesian coal price: -2% y-y; New Castle: -30% y-y).
For 2Q20, we project overall OP of W35.2bn (-31% y-y), with Covid-19 effects to sap the figure both y-y and q-q.