No Valuation Burden
The author is an analyst of Shinhan Investment Corp. He can be reached at sejonghong@shinhan.com. -- Ed.
3Q20 consolidated OP forecast at KRW54.6bn (+3.7% YoY)
Cheil Worldwide is forecast to post consolidated gross profit of KRW270.6bn (-4.8% YoY) and operating profit of KRW54.6bn (+3.7%YoY) for 3Q20. While COVID-19 continues to spread, we expect the company to attempt at growth in profit. Its solid fundamentals have already been confirmed with 2Q20 results. The key client’s ad spend came in at KRW634.5bn in 2Q, which was an unprecedented 43% YoY cut. But Cheil Worldwide’s sales and operating profit fell at a much slower pace of 14.6% and 22.5% YoY, respectively. The drop in below-the-line (BTL) advertising was largely offset by digital advertising, growth of e-commerce services, and labor cost savings.
Circumstances are better than they were in the previous quarter. Profit growth looks possible in 3Q as long as the pandemic is contained. For 4Q, we forecast consolidated operating profit to jump 31.1% YoY to KRW67.6bn, approaching record-high levels, with low base effect kicking in.
No valuation burden
Cheil Worldwide deserves a valuation premium vs. global ad agencies. Its high share of affiliate orders can be seen as an advantage if the key client continues to deliver growth. It is also positive that the company has increased its market share in affiliates through e-commerce services. Net profit in China exceeded KRW16bn in 2019. The Chinese subsidiary Cheil PengTai, which accounts for more than 50% of gross profit in the region, is the third largest digital ad agency in the country. Together with Cheil Beijing, their enterprise value may reach KRW500bn-1tr. Adding net cash holdings of KRW450bn, the parent and subsidiaries in Europe and other regions are severely undervalued.
Retain BUY and raise target price to KRW25,000
Our target price for Cheil Worldwide is raised to KRW25,000 based on the upward revision of our earnings forecasts. We retain our BUY rating in view of: 1) 2H20 operating profit forecast to turn upward; 2) 2021F PER below 13x; and 3) dividend yield of more than 4%. With shares below the absolute price of KRW20,000, it leaves no room for hesitation.