Hotel Lotte Expected to Delay IPO
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Lotte Corp’s earnings visibility is high for 2021 thanks to low base effect and cost efficiency efforts. However, standing at the top of Lotte Group’s governance structure, Hotel Lotte is expected to delay its IPO as its sluggish earnings are expected to continue. As a result, the chances of a Lotte Corp-Hotel Lotte merger look slim for the time being.
Earnings recovery required outside Lotte Corp
Despite Lotte Corp’s expansion of stakes in major affiliates and efforts to increase shareholder value, retail related affiliates are suffering from sluggish earnings due to Covid-19. In addition, a decrease in Lotte Corp’s dividend income in 2021 is inevitable owing to sluggish earnings at Lotte Chemical following an explosion.
In 2021, Lotte Corp’s earnings visibility is high thanks to low base effect and Lotte Shopping’s efforts to improve cost efficiency. However, standing at the top of Lotte Group’s governance structure, Hotel Lotte’s earnings recovery and IPO appear difficult. As a result, the chances of a Lotte Corp-Hotel Lotte merger look slim for the time being.
We maintain a Hold rating on Lotte Corp and raise our TP from W32,000 to W41,500, reflecting: 1) share price changes at listed affiliates; 2) likely additional stake purchases in affiliates; and 3) a discount rate of 45%.
4Q20 preview: Earnings recovery in progress
Lotte Corp should report 4Q20 sales of W2.8tn (+24% y-y) and OP of W159.2bn (+379% y-y).
The likely sound earnings are attributed to Lotte Shopping’s strong OP improvement, led by low base effect (recognition of large amount of expenses in 4Q19) and gradual earnings enhancements on cost efficiency efforts. An increase in equity-method gains due to Lotte Corp’s additional stake acquisition in Lotte Chemical (0.7%) and Lotte Chilsung (4.7%) is also expected.
In 1Q21, Lotte Corp should book OP of W197.1bn (+2,051% y-y) thanks to low base effect at Lotte Chemical, following an explosion in 1Q20.