Investments in New Growth Businesses to Bear Fruit
The author is an analyst of KB Securities. He can be reached at drlee@kbfg.com. -- Ed.
Maintain BUY; Revise up TP to KRW645,000
We maintain BUY on Kakao as we raise our TP 19.4% to KRW645,000. We have revised up our 2021E and 2022E NP (attributable to controlling interests) forecasts by 8.8% and 7.7%, respectively, given robust revenue at major businesses and improving profitability at new businesses.
1Q21E earnings to meet consensus, see ninth consecutive quarter of QoQ improvement
We estimate 1Q21E revenue at KRW1.2tn (+43.6% YoY, +1.0% QoQ) and OP at KRW159.0bn (+80.3% YoY, +6.1% QoQ), both in line with consensus. Key businesses— including Talk Biz (+60.4% YoY), new businesses (+90.0% YoY) and paid content (+84.2% YoY)—should catalyze the growth in earnings.
Equity-method gains and value of stake related to Dunamu to grow amid cryptocurrency market boom
Equity-method gains from Kakao’s stake in Dunamu as well as the value of the stake itself should surge, bolstered by the booming cryptocurrency market and soaring trading value. As of April, daily average trading value at Upbit, a cryptocurrency exchange platform operated by Dunamu, has surged to KRW20tn. Assuming trading commissions at 5bp, the exchange is projected to generate KRW3.7tn in revenue this year. Even if we are to apply a conservative assumption for OPM of 30% (actual OPM in 2019), OP should reach KRW1.1tn. Including shares held by K-Cube Ventures and Kakao Young Entrepreneur Fund, Kakao owns a combined 21.3% stake in Dunamu. As such, Kakao’s equity-method gains should ramp up sharply from 1Q21. Moreover, Coinbase (one of the largest cryptocurrency exchanges in the U.S.) is valued at USD50bn-USD90bn in the OTC market ahead of a direct listing on the Nasdaq (scheduled for Apr 14)—which has further heightened expectations for a revaluation of Dunamu’s EV.
Investments in new-growth businesses to bear fruit
Kakao’s aggressive investments in a broad range of businesses—including paid content, fintech, entertainment and mobility—are beginning to bear fruit. A number of subsidiaries are preparing for IPOs in 2021-2022. The company’s core business (i.e., KakaoTalk) should also see growth in earnings accelerate. The recent share price rally may weigh on investor sentiment given the high volatility of the cryptocurrency market, but we still recommend BUY on Kakao for the long term, now that the company’s mid- to long-term growth roadmap is taking shape.