EV to Climb on Exit from Smartphone Business
The author is an analyst of NH Investment & Securities. He can be reached at j.ko@nhqv.com. -- Ed.
LGE has announced an official exit from the smartphone business, a factor which should favorably influence both its future earnings and share price. Expecting both OP and cash flow to improve from 2021 as a result of the withdrawal, we maintain a Buy rating on LGE.
EV to climb on withdrawal from smartphone business
We raise our TP on LG Electronics (LGE) from W190,000 to W210,000, believing that the firm’s EV has risen from W30.9tn to W33.8tn on net debt reduction effects following its Apr 5 announcement of exiting the smartphone business. For reference, we have already reflected the value of the smartphone business as zero.
For some time, the smartphone business has been negatively impacting both LGE’s earnings and share price, having deteriorated steadily since 2Q15 due to intensifying market competition among smartphone makers and tepid M/S growth. In our view, the era of growth in the smartphone market has passed. As a niche player in the smartphone arena, LGE’s smartphone growth potential had significantly declined in recent years. We favorably evaluate LGE’s exit from the smartphone business in an environment where a turnaround was unlikely.
Moving forward, EV revaluation is to proceed for the firm alongside a likely improvement in investment attractiveness. In addition to withdrawing from the smartphone business, a factor which has plagued LGE’s past valuations, the company’s strengths in the home appliance, TV, and electronic component arenas and associated structural growth stories should enjoy greater attention.
Withdrawal from smartphone business to push up 2021 OP to W4tn
Helped by its exit from the smartphone business, LGE should see significant earnings improvement from 2Q21. Although it is difficult to estimate losses from LGE’s discontinued smartphone business operations at this point, we believe that related losses will total at least W649.5bn (expected operating losses over 2Q21~4Q21). While LGE’s 2021 sales will likely decrease from W68.9tn to W65.9tn due to the suspension of smartphone business, OP should rise from W3.6tn to W4.2tn as a result.