An Earnings Surprise in 1Q20
The author is an analyst of NH Investment & Securities. She can be reached at jy.lee@nhqv.com. -- Ed.
GS Retail announced a 1Q20 earnings surprise, with its results significantly exceeding both consensus and our expectations on increased efficiency at the SSM division. Future earnings momentum is to be spurred by: 1) stable earnings at the CVS division and an earnings turnaround at the SSM division this year; and 2) likely normalized earnings at the firm’s hotel division from next year. With the company’s shares currently trading at an attractive 2020E P/E of 13x, we maintain a Buy rating.
Growth momentum catalysts: Stable earnings at CVS and SSM divisions in 2020; earnings improvement at hotel division from 2021
Reflecting stronger margins at the SSM division, we upwardly adjust our 2020E EPS for GS Retail by 25%, in turning raising our TP by 6% from W49,000 to W52,000. Of note, the level of increase in TP is less than the level of rise in adjusted EPS, as in our SOTP-valuation calculations, we have upped our earnings estimates for the SSM division using a lower target P/E multiple than that for other divisions (SSN: 10x, CVS: 18x, Hotel: 15x). Moving ahead, earnings stability at the CVS division is to stand out, with 800 new stores still to open this year, as independently-run shops are expected to turn to the franchise model. This development is to translate into further purchase rate improvement and depreciation cost reduction. And, earnings at the SSM division should turn around from this year, helped by a growing preference for shopping locally, efficient franchise operations, and higher fixed-cost efficiency. Next year, likely earnings improvement at the hotel division should act as a catalyst for share price growth. This year, we foresee operating income at the hotel division dropping to BEP level due to both Covid-19 effects and ongoing renovations at the Grand Intercontinental Hotel. However, we expect the division’s OP to improve to more than W40bn upon normalized operations next year.
1Q20 review: Impressive sales efficiency at SSM division
GS Retail posted a consolidated 1Q20 earnings surprise, with sales of W2.14tn (+3% y-y) and OP of W88.8bn (+315% y-y). OP surpassed consensus by 83%, even when excluding one-off profit of W45bn from the completion of the Gwanggyo Development Project.
The CVS division booked solid sales of W1.60tn (+3% y-y) and OP of W40.6bn (+51% y-y). Same store sales growth (SSSG) at the division contracted 2.5% y-y, and its store openings increased 5% y-y. Purchase costs fell by 0.5%p y-y (about W6bn), and depreciation cost slid by about W3bn. At the SSM division, SSSG shrank by 5% y-y, but overall earnings were positive, thanks to: 1) higher consumer appetite for shopping locally; 2) the company’s efficient, low-cost franchise operations; and 3) a drop in fixed costs. Meanwhile, the hotel division saw its occupancy rate slide to 40% due to Covid-19. The division was also negatively affected by the renewal of the Grand Intercontinental. Lastly, the other division saw its deficit fall by about W3bn on: 1) the completion of the contract for subway lines 6 and 7; and 2) one-off profit from consulting services for the sale of commercial facilities in Gwanggyo Mall (about W45bn).