Long-term Approach Recommended
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
SPC Samlip’s 2Q20 OP is to drop 25.7% y-y due to falling sales at its cash cow bakery business stemming from lingering Covid-19 effects and the delayed full opening of schools. In 2H20, the firm’s earnings should be supported by low-base effect and narrowing losses at the rest stop business. That said, it is in need of tangible mid/long-term earnings growth drivers.
Long-term approach recommended
We downgrade our rating to Hold and lower our TP by 13% from W80,000 to W70,000 to reflect downward earnings adjustments. Over the near term, SPC Samlip’s 2H20 earnings are to improve, on: 1) low-base effect (absence of one-off costs); 2) a gradual narrowing of losses at the rest stop business; and 3) fading Covid-19 effects. That said, the firm lacks mid/long-term growth drivers. Though generating stable earnings flow, margins from captive sales are likely to fall short of expectations. The company also lags behind its peers in terms of overseas exposure. While business diversification efforts are underway at its cash cow bakery division, additional cost incurrence is likely till its new businesses get on track. We believe that its share price will rebound only after long-term earnings growth momentum is confirmed.
2Q20 preview
SPC Samlip should post 2Q20 consolidated sales of W591.4bn (-2.8% y-y) and OP of W12.3bn (-25.7% y-y). The bakery division is likely to see a y-y decline in sales, as despite bread production capacity expansion, sales at the CVS channel have been declining due to the delayed full opening of schools.
Though the Covid-19 crisis has eased somewhat in 2Q20, people have still restrained from engaging in outdoor activities. This has resulted in sluggish sales at B2B channels such as rest-stops and restaurants. The rest-stop operation business is expected to see greater traffic q-q in 2Q20 thanks partly to a long May holiday season. However, full operations have yet to resume, and additional cost recognition due to lease accounting rule changes means that the business is unlikely to make a positive earnings contribution in 2Q20. Meanwhile, a rise in wheat prices in 1Q20 is expected to weigh on margins at the flour business.