Earnings Growth at Core Business Slowing
The author is an analyst of NH Investment & Securities. He can be reached at william.ku@nhqv.com. -- Ed.
Given the influence of the Covid-19 crisis, we are taking a conservative approach in our operating income estimates for Yuhan. Other than already-expected inflow of licensing fees, the firm currently lacks sources of structural performance growth momentum. Recommending that investors take a conservative approach towards the firm’s shares until the appearance of either an earnings turnaround or new R&D pipeline value, we lower our investment rating from Buy to Hold.
Downgrade to Hold in light of successive earnings shocks
Although adhering to a TP of W52,000 (W260,000 before shares split), we lower our investment rating on Yuhan from Buy to Hold. We downwardly adjust 2020E sales and OP by 6.0% and 18.4%, respectively, reflecting: 1) a slowing in earnings growth at the firm’s core business (if excluding the receiving of one-off licensing fees); 2) the drop in prescription drug earnings due to the Covid-19 outbreak; and 3) continued operating losses at consolidated subsidiaries Yuhan Chemical and Yuhan Health Life. We size operating value at W2,111.7bn by applying a target P/E of 25.2x (a level representing a 10% discount to the 12M FWD average for top-tier pharmaceutical players) to 12M FWD NP of W83.7bn (excluding milestone fees for LaserTinib phase II trials). Considering the new drug value of Lasertinib (W891.6bn, excluding Oscotech’s 40% distribution ratio), we estimate fair market value of W3,521.5bn. We advise investors to take a conservative approach towards the firm’s shares until: 1) the appearance of new major ethical drug items; 2) full-fledged growth of API (active pharmaceutical ingredient) exports; or 3) the signing of new licensing out deals.
Not the old Yuhan
Yuhan posted 1Q20 consolidated sales of W313.3bn (-9.2% y-y) and OP of W1.1bn (-82.4% y-y; OPM 0.4%), figures missing consensus by 7.5% and 90.1%, respectively. The firm’s solid fundamentals, under which quarterly OP steadily clocked at W20bn~W30bn up until three years ago, can no longer be confirmed. Amid the Covid-19 crisis, sales of ethical drugs were held to W193.7bn (-13.3% y-y). And, OTC sales growth slowed to W29.9bn (+3.7% y-y). Expecting Covid-19 effects to continue through 3Q20, we downwardly adjust our annual earnings estimates. Led by top-line growth for major items such as Yuhan rox (liquid bleach), 1Q20 sales at the household goods division upped to W31.6bn (+24.6% y-y). Despite decreased SG&A expenses, OP fell short of market expectations due to ongoing operating losses at consolidated subsidiaries Yuhan Chemical and Yuhan Health Life. Nevertheless, NP upped to W115.6bn (+638.0% y-y) on the booking of one-off gains, including for the disposal of the company’s Gunpo production facilities (resulting in other revenue of roughly W132bn).