Department Store/duty-free Earnings to Improve
The author is an analyst of KB Securities. She can be reached at shinay.park@kbfg.com. -- Ed.
Department store/duty-free earnings to improve; maintain BUY and lift target price to KRW350,000
We maintain BUY on Shinsegae and lift our TP by 6% to KRW350,000. We slightly lowered 2021E/2022E OP by 2%/4%, yet we still increased our TP given higher overseas peers’ EV/EBITDA multiples used to calculate the values of the department store and duty-free businesses. We note that Shinsegae stock has risen by only 15% since March 2020, underperforming the KOSPI and the retail sector index by 63% and 33%, respectively. However, department store sales have normalized substantially, and the duty-free business appears more and more likely to turn profitable. As such, we expect earnings and the stock to trend upward going forward despite uncertainties amid COVID-19.
2021 forecast: OP to surge 358% YoY on higher duty-free and department store earnings
We forecast 2021E gross revenue at KRW9.26tn (+20% YoY) and OP at KRW404.3bn (+358% YoY). Department store OP should surge 63% YoY, backed by a recovery in consumer spending and a low comparison base; this should account for 28% of overall OP growth for the company. Duty-free OP should also improve, reaching KRW75.1bn (51% of overall OP growth) via a sharp decline in rent and QoQ margin improvements, albeit slight, at downtown store branches.
4Q20 review: Revenue/OP down 17% YoY/47% YoY, in line with our estimates
Shinsegae reported 4Q20 gross revenue of KRW2.22tn (-17% YoY) and OP of KRW103.1bn (-47% YoY), both in line with our estimates. However, EBT disappointed at only KRW15.9bn because of impairment losses on right-of-use assets related to the duty-free and department store businesses.
(1) Department store gross revenue (standalone plus Daegu branch) slid 0.6% YoY, while OP contracted 23% YoY to KRW73.8bn. A larger sales contribution from low-margin luxury goods and consumer electronics weighed on GPM. In addition, the suspension of KRW7bn in rent from Shinsegae Duty Free eroded OPM by 1.7pp YoY.
(2) Duty-free gross revenue came in at KRW455.8bn (-48% YoY) with OP of KRW2.6bn (-96% YoY). Rent payments to Incheon International Airport plunged (estimated KRW90bn from 1Q20) following the implementation of a sales-linked rent calculation scheme. SG&A fell KRW12bn. However, KRW18bn in impairment losses from obsolete inventory were incurred.
(3) Central City revenue/OP fell 9% YoY/7% YoY. Despite an increase in rental income, earnings related to JW Marriot Hotel Seoul deteriorated (4Q20 occupancy rate was 31%).
(4) Casamia revenue improved 27% YoY, narrowing the operating loss by KRW4.2bn YoY with the opening of new branches.