Electronic Shelf Label Business to Drive Future Growth
The author is an analyst of NH Investment & Securities. He can be reached at kyeongkeun.kang@nhqv.com. -- Ed.
Solu-M’s ESL business is to become a mid/long-term growth driver as the associated market begins to blossom in earnest. At the power division (its main business), solid earnings growth is evident. We believe Solu-M’s shares are currently undervalued due to post-listing supply-demand dynamics.
ESL business positioned as mid/long-term growth engine
Moving ahead, Solu-M’s electronic shelf label (ESL) business is expected to become a mid/long-term growth engine. At the end of last year, order backlog had increased to W730.0bn thanks to large-scale new orders worth W550bn. We expect the firm’s ESL sales to continue rising to W320bn (+142.6% y-y) in 2021 and W453.3bn (+41.7% y-y) in 2022.
ESL technology is now seeing wider adoption in retail arenas, thanks to its advantages (compared to existing paper price lists) in terms of reducing labor costs, facilitating easier inventory management, and minimizing marking errors. With the ESL market beginning to blossom in earnest, shares of SES-imagotag and Pricer (the world’s number 1 and 2 ESL operators, respectively) have risen 89.8% and 119.1%, respectively, over the past six months. Backed by high expectations for market growth, the two firms’ 2021E P/Es stand at 266.7x and 37.8x, respectively.
Power division (main business) also performing strong; in midst of significant undervaluation phase
Going forward, the power division should also enjoy solid earnings growth, helped by increasing adoption of 3-in-1 boards among its main customers. In particular, ‘Company S’ is to rapidly hike its 3-in-1 board adoption rate from 2% in 2017 to 25% in 2020 to 40% in 2021. As a result, Solu-M’s 3-in-1 board sales should top W728.5bn (+34.9% y-y) in 2020 and W950.0bn (+30.4% y-y) in 2021, leading overall top-line growth at the power division.
In calculating Solu-M’s EV, conservatively applying a multiple of 25x to the ICT division (ESL and IoT) results in overall EV of approximately W1.9tn (assuming a power division multiple of 8.0x and effective tax rate of 10%). Given such, we believe that Solu-M’s shares are currently undervalued, affected by post-listing supply-demand dynamics.