Growth Momentum Likely to Emerge in 2H20
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
KT&G’s 1Q20 results missed consensus due to sluggish earnings at DFSs and overseas subsidiaries and channel mix adjustments at KGC. Growth momentum is likely to emerge in 2H20, with full-fledged exports to the Middle East and exports of e-cigarettes.
Focus on likely 2H20 earnings improvement
We maintain a Buy rating and TP of W100,000 on KT&G. While the firm’s earnings fell short of forecasts, an improvement is expected from 2Q20 thanks to full-fledged tobacco exports to the Middle East and normalized prices at the company’s Indonesian subsidiary. In 2H20, overseas growth momentum should become more pronounced as exports of e-cigarettes become visible, and the firm’s overall earnings and corporate value are expected to level up. Given KT&G’s strong market share in the domestic cigarette market, overseas growth potential, and high dividend appeal, we view the stock as being strongly undervalued.
1Q20 earnings disappoint consensus
The company booked consolidated 1Q20 sales of W1,178.4bn (-0.6% y-y) and OP of W315.0 (-9.5% y-y), missing our estimates and consensus. The main reasons for the weak earnings are sluggish DFS sales, reduced exports, decreased earnings at the Indonesian subsidiary, and lower profitability at Korea Ginseng Corporation (KGC) due to channel mix changes.
KT&G’s non-consolidated sales rose 0.4% y-y, but OP fell 1.1% y-y. Domestic regular cigarette sales volume (+5.5% y-y) stayed solid, but DFS sales (-300mn pcs y-y) and exports (-33.7% y-y; excluding US subsidiary) were sluggish, and profitability declined due to high labor costs and increased commissions.
KGC’s sales slid 1.9% y-y owing to sluggish DFS sales, affected by the spread of Covid-19 and the timing of the Lunar New Year holiday. OP dropped 22.0% y-y, declining faster than sales due to an increased home shopping sales portion with high sales commissions, reduced corporate channel sales, and investment costs to strengthen the red ginseng and cosmetics businesses.
Among KT&G’s consolidated subsidiaries, the Indonesian subsidiary suffered from delays in product price hikes after tax increases and higher SG&A expenses. The subsidiary saw 2.5% y-y sales growth and 93.3% y-y OP decline.