Growth Momentum to Sustain
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Cosmax delivered an earnings surprise for 1Q20, with OP exceeding consensus by 49% on stronger domestic margins. Moving forward, earnings and EV should rise, backed by the firm’s manufacturing competitiveness and the securing of additional online-focused clients.
Growth momentum to sustain on client base diversification and nimble production flexibility
Maintaining a Buy rating and continuing to include Cosmax among our sector top picks, we raise our TP by 25% from W100,000 to W125,000 in reflection of upward adjustments to our earnings estimates. Although Covid-19 has been having some impact on earnings, Cosmax has been utilizing the crisis as an opportunity to diversify its customer portfolio, responding flexibly to its clients’ changing needs. With previous fears of intense competition now easing, we expect the firm’s Chinese subsidiaries to regain growth momentum by attracting greater numbers of online-focused customers. Even amid the pandemic, Cosmax should enjoy solid North American and Southeast Asian market performances on both the production of hand sanitizer products and strengthening relations with online-dedicated clients. Given Cosmax’s global top-level technology, infrastructure, and sales power, we view its shares (currently trading at a 12-month FWD P/E of 18x) as being significantly undervalued.
1Q20 review: Chalks up earnings surprise on widening margins at domestic subsidiaries
Cosmax delivered an earnings surprise for 1Q20, posting consolidated sales of W328.5bn (+0.2% y-y) and OP of W16bn (+18.4% y-y). OP beat consensus by 49%, with stronger domestic arm OPM leading overall improvement
Domestic sales climbed 6.2% y-y, with accompanying OP upping markedly (+111.7% y-y). We attribute a notable widening in domestic OPM (+4%pt y-y) to partial automation, a reduced COGS-to-sales ratio, and a better product mix.
Amid the Covid-19 outbreak, earnings at Cosmax’s Chinese business were hit by a stop in production that lasted almost a month. However, the Guangzhou subsidiary sustained y-y sales growth, helped by the rise in orders from online-focused clients in March. While sales at Cosmax’s Shanghai subsidiary decreased y-y, we favorably view greater diversification of its client portfolio (increasing portion of online-dedicated customers).
At NuWorld and Cosmax USA, Covid 19-related impact began to weigh upon earnings from March. But, both are well navigating the shift in business landscape, via, for example, the start of hand sanitizer production from 2Q20.