Earnings Continuing on a Gradual Uptrend
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 KRW680,000
We initiate our coverage of Ottogi with BUY for a target price of KRW680,000. Investment points are: 1) steady earnings growth on par with past averages; and 2) cheap valuations with shares trading at the lower end of the past 5-year band. Our target price is based on PER valuation, placing focus on growth momentum instead of the rising burden of depreciation expenses with capex spend continuing in the mid-to high-KRW100bn range. Our target PER of 21.7x represents a 5% discount to the average PER of the past five years, or a 5% premium to the end-2019 PER of 20.6x. In 2020, we expect top-line growth to continue at past five-year average levels, but operating profit to remain flat near 2019 results.
2020 growth outlook: Sales +3.4% YoY, OP +0.3% YoY
For full-year 2020, we forecast sales at KRW2.44tr (+3.4% YoY) and operating profit at KRW148.7bn (+0.3% YoY). Operating profit margin should slightly decline on a YoY basis to 6.1%. Sales likely increased 3.8% YoY in 1Q20, with top-line growth expected to reach 5.9% YoY for dried foods and 7.9% YoY for ramyeon amid the COVID-19 outbreak. Sales from sauce/condiments and fat/oil products should have remained near previous year levels in 1Q20. SG&A is estimated to have climbed 6.6% YoY. Our earnings forecasts reflect overall trends continuing from last year rather than one-off issues.
Trading at lower end of historical valuation band at 2020F PER of 17.7x
Shares are trading at a PER of 17.7x to 2020F EPS of controlling interests, indicating a 25% discount to the past 5-year average PER of 22x. Share valuations are unlikely to rise above past averages given the limited growth outlook, but current levels near the lower end of the historical valuation band appear undemanding considering that earnings are continuing on a gradual uptrend. We thus recommend taking a mid/long-term approach on Ottogi.