Solid Performance
The author is an analyst of KB Securities. He can be reached at drlee@kbfg.com. -- Ed.
Maintain BUY and raise target price to KRW27,000
We maintain BUY and raise our TP by 5.9% to KRW27,000 (12m fwd EPS x historical avg. 18.7x P/E) for Cheil Worldwide. 2020E/2021E OP were revised up 7.4%/5.2% to reflect steady recoveries in standalone and digital ad earnings amid the pandemic-induced ad market slump. We favor Cheil Worldwide as our top pick for Media given the company’s (1) advances fueled by the digital ad business, (2) improving cost structure and (3) dividend merit (2020E dividend yield of 4.0%).
Solid performance resulting from top-line growth and improvement in cost structure
For 3Q20, Cheil Worldwide posted GP of KRW278.5bn (-2.0% YoY) and OP of KRW59.4bn (+12.8% YoY). Standalone GP growth entered positive territory at 11.3% YoY, while Overseas GP limited its decline to -6.5% YoY. Conditions overseas seem favorable: Europe/China GP contracted at a slower pace than they did in 2Q20, and North America GP grew 30.1% YoY. Despite COVID-19 undermining the ad business below the line, Cheil Worldwide fared well thanks to adjustments to its business portfolio (e.g., focus on digital ads and e-commerce) and the acquisition of new ad accounts. SG&A cuts continued in 3Q20, providing an extra boost to profit margins.
Earnings run to continue into 2021
We expect the earnings run to continue into next year. 2021 GP/OP should grow 12.0% YoY/15.8% YoY as digital ad growth adds to the recovery of businesses hurt by the pandemic. The digital ad business will continue to grow after the pandemic subsides given (1) the growing importance of ad ROI amid the sluggish economy, (2) the expansion of contactless sales channels and (3) the growth of e-commerce. Furthermore, if the company manages to implement significant cost cuts this year, GP should enter an upturn and boost profit margins higher than ever before.