Prospects Remain for Strong Dividend Payout
The author is an analyst of NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. -- Ed.
In 2021, Innocean should enjoy a strong earnings growth turnaround, backed by low-base effect, a streamlined cost structure, and anticipated sales improvement. We expect the ad industry’s gradual recovery to be reflected in Innocean’s earnings from 4Q20, predicting that an earnings recovery trend will sustain afterwards. The firm’s strong willingness to pay out dividends is a positive for shareholders. We maintain a Buy rating.
To see strong positive y-y earnings growth in 2021
Amid a shrinking ad market last year due to Covid-19, a rise in labor costs stemming from the acquisition of Wellcom presented a burden for Innocean, inevitably pulling down margins. Responding to the prolonged contraction of the global ad market, Innocean has made improvements in its cost structure via efforts to streamline SG&A expense, including 2H20 adjustments to manpower at Wellcom.
Innocean is kicking off 2021 with an efficient cost structure and the help of favorable base effect. We expect the firm to enjoy robust y-y earnings growth this year, backed by: 1) marketing budget expansion on the addition of new brands (IONIQ) at captive advertisers and corporate identity changes at Kia Motors; and 2) the intact possibility of sales growth on a resumption in marketing by non-captive advertisers. We maintain a Buy rating.
4Q20 preview: Beginning of recovery
We expect Innocean to report consolidated 4Q20 GP of W154.4bn (+1% y-y) and OP of W38.7bn (-3% y-y), with both figures arriving in line with the recently climbing consensus.
At headquarters, 4Q20 GP is estimated at W50.3bn (+7% y-y). Solid earnings at the below-the-line (BTL; face-to-face marketing communications) ad business were likely secured thanks to the Genesis GV70’s domestic launch and GV80’s US launch. With the ad industry showing a gradual recovery on an overall resumption in marketing, Innocean should enjoy an ongoing upward earnings trend for some time. At the overseas business, GP is estimated at W104.3bn (-2% y-y), considering both the continuing global effects of Covid-19 and the earlier-than-expected incorporation of Wellcom earnings from December.
Prospects remain for strong dividend payout
Impacted by Covid-19, Innocean inevitably faced declining profits in 2020. However, considering its strong commitment to shareholder-friendly dividend policy, there is the possibility that Innocean will maintain its robust DPS this year via an exceptional hike in payout ratio. For reference, 2020 DPS arrived at W1,500.