Valuation Discount Expected to Fade
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com. -- Ed.
While Kiwoom’s share price is hitting record highs, its P/E multiple remains at rock-bottom levels. We expect this valuation discount to fade upon Kiwoom being designated a comprehensive financial service provider (in 2021 at the earliest).
Raise TP to W180,000; maintain Buy rating
We raise our TP on Kiwoom to W180,000 in reflection of upward revisions to earnings estimates. We take into consideration both: 1) the currently sound stock market environment and ongoing recovery in trading volume; and 2) Kiwoom’s rising M/S and impressive strength in retail brokerage business (for both domestic and foreign stocks). Our TP is calculated by applying a fair P/B of 1.37x to 2021F BPS of W131,293.
Valuation discount to fade upon designation as comprehensive financial service provider
We expect Kiwoom to be designated a comprehensive financial service provider in 2021 (at earliest) or 2022, as the firm is enjoying a rapid expansion in shareholders’ equity thanks to its superior ROE and lower payout ratio versus peers. Having come to W2.3tn (+17.9% y-y) in 3Q20, Kiwoom’s total equity (non-consolidated) is likely to reach W2.9~3.0tn in 4Q21.
With the anticipated designation, Kiwoom will be allowed to offer both prime brokerage and credit offering services. Despite such expected developments, however, Kiwoom’s retail-based business model should remain intact. Nevertheless, Kiwoom should come to boast a greater extent of IB business—likely reaching a level comparable with that at its larger-sized peers. We expect the valuation discount that has been imposed on Kiwoom as a brokerage-specialized securities firm to ease upon securing of the new designation.
Share price at all-time highs, but valuations still rock bottom
As of Dec 8, Kiwoom’s shares were trading at W138,500. While its shares have undergone a minor price correction after touching a new high, in our view, the recent share price jump was still insufficient to account for Kiwoom’s earnings improvement—accordingly, its valuations look to remain at rock-bottom levels. For reference, Kiwoom’s 2020E P/E of 5.1x represents not only a historical low but also the most significant undervaluation relative to peers in the sector. Even if assuming a decline in trading volume next year, the company’s 2021F P/E sits at 6.2x. Believing that its shares continue to boast valuation merit despite the recent share price increase, we adhere to Kiwoom as our sector top pick.