RH Business Settles in Faster than Expected
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
The growth of Hanssem’s RH business looks to be offsetting any concerns related to Covid-19. With a full-fledged growth strategy set to take effect from 2021, Hanssem is predicted to enjoy ongoing earnings improvement moving ahead. And, given its 12-month forward P/E (including treasury stock) of 27x, the firm’s valuations appear robust.
RH business settles in faster than expected
Adhering to a Buy rating, we raise our TP on Hanssem from W71,500 to W120,000, drawing attention to the creation of a favorable external business environment, including: 1) strengthening regulations on reconstruction; and 2) a rise in telecommuting due to Covid-19. We note that Hanssem’s internal business structure is improving faster than originally expected, backed by: 1) the active transition of partner stores into agency stores at Rehaus (RH: remodeling business, providing total interior design solutions); 2) a win-win scenario for existing store owners and the firm; and 3) external growth via a range of channels. In addition to reflecting such positive developments in the internal and external business environments, the increase in our TP considers weighted average EBITDA and a 15% increase in net EPS over 2020E~2021F, as well as a reduction in our EV/EBITDA discount from 25% to 15%.
Based on 12-month weighted average EPS, Hanssem’s current share price and TP equate to 12-month forward P/Es of 27x and 35x (similar to the 2014-level), respectively. We note that Hanssem’s sales grew more than 20% y-y in 2014, a period during which its P/E multiple averaged around 40x on both structural changes at the company and a housing market boom. With structural improvement at RH expected to drive up the firm’s interior design M/S and related margins, the creation of a virtuous cycle is anticipated going forward.
All businesses perform solidly in 2Q20
Hanssem reported consolidated 2Q20 sales of W517.2bn (+25.9% y-y) and OP of W23bn (+172.3% y-y), far exceeding our estimates and consensus. The rosy results are attributed to: 1) sales growth at the RH/KitchenBach and interior furniture businesses of 19% y-y and 21% y-y, respectively; and 2) lower than expected operating expenses of W3bn at the Chinese subsidiary. For reference, losses at the Chinese subsidiary broke down as W3bn in operating expenses, W4bn in non-operating expenses, and W7bn in total. In addition, we believe that Hanssem’s 2Q20 results enjoyed a boost from stronger than anticipated housing transaction volume and the government’s release of pandemic support funds.