Management Focus Put on Improving Financial Structure
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Efforts to reduce financial risk at CJ Corp have been underway since 2H19, through the restraining of M&A activities, disposal of idle assets, and cost reduction efforts. However, it will be some time before these efforts bear tangible results due to the spread of Covid-19. We believe that a dividend revenue increase is a pre-condition for shareholder value improvement.
Aggressive dividend policy unlikely due to Covid-19
In 2020, CJ Corp’s consolidated OP is expected to decline y-y for the first time since 2013 (W1,468.2bn, -3% y-y). The impact of Covid-19 varies widely by subsidiary. CJCJ’s earnings should climb sharply y-y in 2020, but considering the affiliate’s dividend distribution history, the anticipated sharp earnings growth is unlikely to translate into a rise in dividend income for CJ Corp. Noting CJ Corp’s average three-year payout ratio of 94% (non-consolidated), the firm will be hard pressed to raise dividends without a dividend revenue increase. In addition, the group’s shifted management focus to qualitative growth (aimed at improving its financial structure) and CJ Corp’s participation (W93.7bn) in CJ CGV’s rights offering are also expected to stand in the way of aggressive dividend policy execution (2020E DY at 2.1%, based on current share price).
We raise our TP on the firm from W75,000 to W92,000 to reflect share price hikes at listed subsidiaries and earnings forecast revisions for unlisted subsidiaries. However, with its share price already nearing our TP, we maintain a Hold rating. The shares are currently trading at a 53% discount to NAV.
2Q20 preview: Impact of Covid-19 varies by subsidiary
We expect CJ Corp to book 2Q20 sales of W8,579.0bn (+1% y-y) and OP of W278.8bn (-24% y-y), with OP missing market consensus.
By subsidiary, earnings at CJCJ likely continued to improve in 2Q20, thanks to the strong performance of the processed food business and greater demand at its delivery subsidiary CJ Logistics. We believe CJ Olive Young well defended its margins, in spite of an overall sales decline, by expanding the portion of online sales. As people have become fearful of crowded places due to Covid-19, CJ CGV likely book a large-scale operating loss, and earnings at CJ Freshway and
CJ Foodville likely came in sluggish. We note that CJ CGV carried out a rights offering (W240bn) and CJ Foodville sold its 15% stake in Twosome Place (W71.0bn) to secure cash. We forecast that CJ Corp will book 3Q20 OP of W459.0bn (+8% y-y).