Logistics Business Earnings Robust
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
We expect LGI’s 1Q21 earnings to meet consensus. Full-year 2021 OP is set to surge 46% y-y, backed by ongoing robust logistics business earnings and a rebound in commodity prices. Going forward, we look to the possible listing of Pantos (after separation of affiliates), new business expansions and synergy effects, and the further enhancement of shareholders’ value.
Positively view E&P/palm oil business turnaround, strong logistics business earnings, likely separation of affiliates
In accordance with LG’s spin-off plans, LG International (LGI) is to be transformed into a major subsidiary of the new LG holding company structure. Securing external customers after the separation of affiliates will represent a challenge, but positives from the move should include more rapid decision-making, the possible listing of consolidated subsidiary Pantos, promotion of new businesses, synergies expansion within the new holding company structure, and enhancement of shareholder value.
We boost our 2021 OP estimate by 7% (W232.9bn, +46% y-y), reflecting: 1) likely continued robust earnings at LGI’s logistics business; and 2) soaring coal prices and strong palm oil prices since the start of the year. Given the spread of socially-responsible investment, future coal business expansion looks challenging. However, backed by its logistics/trading operations and entry into new businesses (including waste treatment, platform, and healthcare ventures), synergy effects among affiliates should accelerate under the new LG holding company structure.
Maintaining a Buy rating, we raise our TP from W33,000 to W39,000, reflecting upward adjustments to our earnings forecasts.
1Q21 preview: To start reflecting favorable commodity prices; logistics business continuing strong
We expect LGI to post consensus-satisfying 1Q21 sales of W2.65tn (+8% y-y) and OP of W61.5bn (+23% y-y).
We believe that earnings are sustaining strong at LGI’s logistics business (1Q21E OP of W40bn, +8% y-y), helped by the absence of one-off costs booked in 4Q20, and by ongoing strong freight volume and freight rates. The firm’s E&P/palm oil domain should show healthy earnings (1Q21E OP of W14.5bn, +190% y-y) in keeping with a continuing uptrend in the coal price (Indonesian coal +30% q-q, Newcastle +31% q-q) and the picking up of palm oil profits amid sustained strong palm oil prices (+5% q-q). And, despite the absence of one-off gains recorded in 4Q20, LGI’s industrial materials/solutions business should deliver solid 1Q21 earnings (OP of W7bn, -11% y-y) on brisk IT trading volume.