Overseas Operations Volatile

The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.

 

Initiate coverage with BUY for a target price of KRW15,000

We initiate our coverage of Pulmuone with a BUY rating and a target price of KRW15,000. Investment points are: 1) steady earnings from the food business; 2) low base effect and gradual improvement in profits from overseas operations; and 3) expectations for HoH recovery in earnings from institutional food service and concession business in 2H20. Our target price is based on a target PER of 25.5x, which represents a 10% discount to the past five-year average PER (adjusted to factor out one-off expenses booked in 2019). Earnings will likely continue on an uptrend this year given the low YoY base at overseas units. Pulmuone is a stock of interest in the food/beverage sector.

2020 growth outlook: Sales +0.8% YoY, OP 51.6% YoY

For 2020, we forecast sales at KRW2.4tr (+0.8% YoY) and operating profit at KRW46.4bn (+51.6% YoY). Profit growth comes to 30.3% YoY when taking into account KRW5bn in costs spent to improve efficiency of the Japanese unit last year. Operating margin is projected to rise by 0.6%p YoY to 1.9%, recovering to the level seen in 2018. We estimate YoY sales growth of the domestic food business at +4.8%, foodstuff -7.3%, institutional food service/restaurants -8.1%, and overseas operations +6.2%. The holding company and health/living unit will likely see sales grow 3.1% and 24.3% YoY, respectively.

Stable domestic business vs. volatile overseas operations

We forecast 2020 consolidated operating profit to reach KRW46.4bn, of which food/foodstuff operations will generate KRW61bn. In 2019, Pulmuone recorded consolidated operating profit of KRW30.6bn, of which KRW49.4bn came from food/foodstuff, KRW3.7bn from logistics, and KRW6.4bn from institutional food service/restaurants. The health/living and overseas units incurred operating losses of KRW1.6bn and KRW36.2bn, respectively, dragging down company-wide profitability.

Overseas operations are expected to suffer a loss of KRW26.2bn this year, eating into roughly half of the profit generated from the domestic food/foodstuff business. The projected KRW3.6bn profit from logistics and KRW2bn profit from health/living are similar to last year’s levels. Increased operating loss from institutional food services/restaurants will be inevitable due to the COVID-19 outbreak. However, we maintain our positive view on profit growth in 2H20, based on gradual improvement expected from 2Q and easing social distancing measures at a time when the concession market enters a strong demand season. When factoring out uncontrollable issues, domestic earnings momentum remains intact. Confirmation of directionality for the overseas business should add upside momentum to Pulmuone shares.

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