Exports to the Middle East Expected to Grow
The author is an analyst of Shinhan Investment Corp. She can be reached at hpark@shinhan.com. -- Ed.
1Q20 consolidated OP misses consensus at KRW315bn (-9.5% YoY)
KT&G posted consolidated sales of KRW1.18tr (-0.6% YoY) and operating profit of KRW315bn (-9.5% YoY) for 1Q20. Sales came in line with our estimate, but operating profit fell short by about 10%. On the operating side, we note: 1) market share gain for cigarette business; and 2) increased home shopping sales for red ginseng business. Red ginseng sales decreased by only 1.9% YoY. A 20.7% YoY drop in offline sales (department/discount stores, etc.) was offset by a 21.6% YoY rise in online/home shopping sales. But red ginseng operating profit shrank by 22.1% YoY due to the burden of commissions. Cigarette sales rose 0.4% YoY on market share gain (about +1%p YoY). The cigarette market grew roughly 3% YoY despite the COVID-19 pandemic. Other operating income was mostly as expected. Net profit climbed 7.3% YoY thanks to the proceeds from the sale of financial assets and forex gains.
2Q20 consolidated OP to rise 0.7% YoY, expectations intact for export growth
We expect growth in exports to the Middle East from 2Q onward. Total export value for 2Q is forecast to jump 31.6% YoY. Consolidated sales are estimated at KRW1.3tr (+3.8% YoY) and operating profit at KRW401.8bn (+0.7% YoY). Red ginseng sales from offline channels should improve QoQ as the pandemic subsides. Sales are projected to grow 6.4% YoY from the red ginseng business and 2.3% YoY from the cigarette business.
Retain BUY for a target price of KRW107,000
KT&G’s earnings will likely continue upward on an increase in exports to the Middle East from 2Q and sales from the global distribution partnership with Philip Morris International from 2H. We find shares attractive at current cheap valuations (PER of 10x levels). However, we need to check into the accounting fraud allegations raised by the Financial Supervisory Service in March. Our rating for KT&G remains unchanged at BUY for a target price of KRW107,000 in view of earnings and valuation momentum.