Earnings Reach Record High in 1Q20

The author is an analyst of NH Investment & Securities. He can be reached at william.ku@nhqv.com. -- Ed.

 

Dong-A ST delivered quarterly record-high earnings in 1Q20 on supply expansion prior to enforcement of the MFDS’s order to suspend business operations (March~May). But, operating losses in 2Q20 are to be inevitable due to the suspension. Reflecting a rise in the industry multiple, we raise our TP, maintaining a Buy rating.

Adjust target multiple (21.2 x → 24.9x) on higher industry multiple

Adhering to a Buy rating, we raise our TP on Dong-A ST from W95,000 to W110,000. Although the firm recorded an earnings surprise for 1Q20 on supply expansion prior to enforcement of the Ministry of Food and Drug Safety (MFDS)’s order to suspend business operations (March~May), we upwardly adjust 2020E EPS by only 1.7%. But, we revise up our target multiple from 21.2x to 24.9x on a recent rise in the pharmaceutical industry multiple. We estimate Dong-A ST’s operating value at W963.1bn by applying a target P/E of 24.9x (a 10% discount to the 12M FWD average P/E for Yuhan, Green Cross, and CKD) to 2020E NP of W387bn. Top-line results for US phase 1b trials on DA-1241 (diabetes) are expected to be announced in 3Q20. We adhere to a Buy rating, anticipating of multiple sources of R&D momentum, including the expected completion of preclinical trials on DA-4501 (MerTK) and the planned start of US phase III trials on DA-9801 in 2H20.

Display even sales growth across all business domains

On a non-consolidated basis, Dong-A ST announced 1Q20 sales of W201.2bn (+41.1% y-y) and OP of W53bn (+158.5% y-y; OPM of 26.3%), topping consensus by 5.3% and 33.5%, respectively. Sales at the firm’s ethical drugs business upped 82.4% to W137.2bn, pushed up by: 1) supply expansion prior to enforcement of the MFDS’s order (due to violation of pharmaceuticals sales order rules) to suspend business operations (March~May); and 2) robust sales growth for products that are not subject to the MFDS’s order, including Motiritone (digestion), Sugarone (diabetes), Jublia (nail fungus), and Dalbi (hypertension). Exports totaled W38.4bn (+19.6% y-y), led by top-line growth for major export items (including Bacchus and anti-tuberculosis drugs), favorable forex conditions, and the start of booking of Japanese market sales of Nesp Biosimilar DA-3880. The medical device division recorded sales of W19.8bn (+8.8% y-y). SAE ratio decreased 15.6%p on reduced marketing activity and R&D costs amid the Covid-19 crisis. But, considering the business suspension in 2Q20, we adjust up full-year 2020E sales and OP by only 2.1% and 4.5%, respectively.

 

Copyright © BusinessKorea. Prohibited from unauthorized reproduction and redistribution