On a Firm Path toward Recovery
The author is an analyst of KB Securities. She can be reached at shinay.park@kbfg.com. -- Ed.
Across-the-board earnings improvement in sight; stock to continue to gain ground
We maintain BUY and raise our TP by 28% to KRW65,000 for Korea Kolmar, though we revise down 2020E/2021E OP by 29%/27% to reflect the impact of the company’s disposal of its pharmaceutical CMO business in December. Our TP was raised because: (1) We revised up 2021E-26E OP CAGR (9%→12%) to reflect the prospect of across-the-board improvements with an improvement in industry conditions (attenuation of COVID-19) and a favorable 2020 base; and (2) We expect 2021 net debt to decline (KRW967.1bn→KRW697.0bn) with an influx in proceeds from business disposal (KRW301.1bn).
2021 forecast: Revenue/OP at +14%/35% YoY
We believe the company is on a firm path toward recovery, with 2021E revenue/OP at KRW1.5tn (+14% YoY)/132.9bn (+35% YoY): (1) Domestic Cosmetics revenue should increase 14%, with OP only inching up 1%, hindered by an unfavorable 2020 base (high profits in 2Q20). (2) HK inno.N should deliver revenue/OP growth of 14%/33%, supported by a YoY recovery in prescription drug/beverage sales; the pharmaceutical company is well on its way to making a meaningful contribution to company-wide performance.
4Q20 preview: Revenue to take hit from COVID-19 but OP to soar 40% YoY on favorable base
For 4Q20, we forecast consolidated revenue/OP (excl. pharmaceutical CMO business) at KRW341.6bn (+1% YoY)/29.1bn (+40% YoY).
(1) Domestic Cosmetics should see revenue dip 10% YoY with the prolongation of COVID-19, but OP should skyrocket 133% YoY due to one-off loan loss provisions recorded in 4Q19.
(2) Kolmar’s Chinese operation should see revenue up 13% YoY (-49%/+103% in Beijing/Wuxi), narrowing its operating loss by KRW2.7bn YoY to KRW2.8bn. 4Q20 saw the company’s first Chinese order coming from major client Atomy and then revenue growth supported by other Chinese clients.
(3) HK inno.N should deliver 11% revenue growth with the booking of revenue from smallpox vaccines, which recurs every 4Q, as well as brisk sales of new drug K-Cab. However, OP should dip 2% on sluggish sales for the high-margin anti-hangover drink Condition as well as accounting changes.