High-margin Data Center Business to Drive Growth
The authors are analysts of Shinhan Investment Corp. They can be reached at snowKH@shinhan.com and swoong92@shinhan.com, respectively. -- Ed.
2Q20 sales forecast at KRW228bn (+5%YoY)
Lotte Data Communication is expected to post sales of KRW228bn (+5% YoY) and operating profit of KRW10bn (-27% YoY) for 2Q20. As an IT service provider, we believe the company will continue to see steady growth in earnings each quarter. Growth in operating profit will likely reach 67% QoQ in 2Q20, driven by order intake from public agencies for terminals and a KRW30bn order from the group's logistics affiliate Lotte Global Logistics. Operating profit margin is forecast at 4.4% (+1.4%pQoQ).
High-margin data center business to drive mid/long-term growth
We expect earnings to continue on a steady uptrend in 2020. The data center business currently provides comprehensive management services for group affiliates, and is expected to widen its revenue source with the addition of global clients. Full-year sales from the data center business are forecast at KRW103.1bn (+10% YoY) for 2020.
Lotte Data Communication’s fourth data center is scheduled for completion on Dec. 4, 2020. Once equipment installations are completed, the added capacity should drive steady sales growth through 2022. Reaching up to KRW19.3bn (+174% YoY) for the full year, operating profit secured by the data center business is expected to account for 38.6% (+21.5%p YoY) of the company's total operating profit in 2020. In 2021, the addition of a global data center should drive up operating profit from the data center business to KRW26.9bn (+39% YoY). With discussions underway for the construction of more data centers, we expect the data center business to emerge as a major driver of mid/long-term growth in earnings.
Retain BUY for a target price of KRW51,000
We maintain our target price for Lotte Data Communication at KRW51,000, based on 2020F EPS of KRW3,003 and a target PER of 17.1x (domestic peer average PER). The company's growth momentum is seen intact, with its fourth data center nearing completion and group affiliates increasing investment into IT systems. Our rating for Lotte Data Communication thus remains unchanged at BUY.