Smooth Sailing Despite Unfavorable Conditions
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Despite rising raw material costs and Covid-19 effects, Dongwon F&B likely maintained a stable OP trend in 3Q20 on business diversification. Noting rising sales portions for high growth businesses and the firm’s strong valuation merit, we believe that its current share price offers a good dip-buying opportunity.
Shares at bottom of historic valuation band
We maintain a Buy rating and TP of W270,000 on Dongwon F&B. Though the firm is still viewed as a canned tuna producer, Dongwon has succeeded in business diversification. In addition, it has been making aggressive efforts to secure mid/long-term growth drivers, responding swiftly to changes in consumer tastes and distribution channel shifts. While Covid-19 has hurt sales to CVSs and restaurants, sales at the high-margin HMR business, online-focused livestock distributor Geumcheon, and the HMR-dedicated online shopping mall The Banchan have leveled due to Covid-19. The impact of Covid-19 on sauce producer Samjo Celltech has also been smaller than feared, thanks to its high franchise restaurant sales portion. We expect the subsidiary’s margins to rebound to double-digit levels in 2021. With tuna prices having fallen to US$1,300/ton, raw material cost concerns have eased of late. Weighing these factors, we believe that the recent share price drop is excessive, and that a good dip-buying opportunity has emerged—Dongwon’s shares are currently trading at a 12-month forward P/E of 8x, the bottom of its historic valuation band.
3Q20 preview: Smooth sailing despite unfavorable conditions
We forecast consolidated 3Q20 sales of W875.2bn (+6.1% y-y) and OP of W36.1bn (+1.7% y-y). Despite higher tuna input prices, inventory depletion likely allowed the firm to ease some of the cost burden. Moreover, low-base effect (3Q19 OP was weighed upon also by high marketing expenses) likely reduced the cost burden. Meanwhile, we believe that earnings contributions from the highmargin HMR business rose further in 3Q20.
In 3Q20, Geumcheon and The Banchan (subsidiaries of Dongwon Home Food) likely continued to book strong sales growth. And, despite Covid-19 effects, we believe that Samjo Celltech, the school food catering business, and the food materials business recorded sound earnings. That said, a sharp sales decline looks inevitable for the restaurant business.