Earnings Growth Steady
The authors are analysts of Shinhan Investment Corp. They can be reached at kimkyuri@shinhan.com and changmin.yoon86@shinhan.com, respectively. -- Ed.
1Q20 OP of KRW16.3bn (+18% YoY) meets consensus
Douzone Bizon posted sales of KRW71.2bn (+14% YoY) for 1Q20. Despite negative impact of the COVID-19 outbreak (difficulty in new client wins, delays in ERP solution development, etc.), sales came in line with the market consensus. By division, sales from the ERP business stood at KRW37.2bn (+3% YoY), groupware KRW7.3bn (+19% YoY), and cloud business KRW13.4bn (+13% YoY).
Operating profit increased 18% YoY to KRW16.3bn. Outsourcing expenses, which have been on a decline since 2H19, are estimated to have dropped 24% YoY to KRW6bn. Net profit of KRW10.4bn (-9% YoY) fell short of the consensus (KRW12.8bn) due to financial expenses of KRW1.9bn on increased debt from the purchase of Douzone Eulji Building. The company is projected to book non-operating financial expenses of KRW1.9bn-2bn every quarter going forward.
2020OP forecast at KRW79.1bn (+19% YoY)
For 2020, we forecast sales at KRW303.9bn (+16% YoY) and operating profit at KRW79.1bn (+19% YoY). Douzone Bizon’s WEHAGO, an ERP platform tailored for small and privately-owned businesses, is expected to generate visible earnings from 2020. With the launch of the new platform, the company should be able to: 1) expand into ERP services for small businesses; 2) generate additional revenue from ad and fintech services leveraging on the collection and analysis of big data; and 3) accelerate the shift to cloud and platform ERP. Earnings forecasts will likely be revised upward once WEHAGO-related sales are ramped up (monthly usage fees, accounts receivable securitization fees, etc.).
Retain BUY for a revised-up target price ofKRW110,000
Our target price of KRW110,000 is based on 2020F EPS of KRW1,659 and a target PER of 65.3x. Shares are currently trading at higher valuations than peers (2020F PER of 54x vs. peer average 35x). However, we see ample upside given forecasts for: 1) steady earnings growth; and 2) expansion of the cloud business backed by the WEHAGO platform.