Stellar 1Q21 Earnings Results by Key Affiliates
The author is an analyst of KB Securities. He can be reached at newday@kbfg.com. -- Ed.
Maintain BUY and raise our target price to KRW150,000
We maintain BUY and revise up our 12m TP by 25.0% from KRW120,000 to KRW150,000 (based on target P/B of 1.04x applied to 12m fwd BVPS) to reflect: (1) upward revisions to 2021E/2022E NP attributable to controlling interests of 19.6%/11.8% based on solid earnings results at key subsidiaries; (2) a change in 12m fwd base period; and (3) a rise in cost of equity (8.90%→8.98%) stemming from changes in key assumptions (e.g., beta, RFR). Our new TP offers 18.6% upside against the May 13 close (20.8% incl. dividend income).
Earnings surprise in 1Q21
LG Corp. delivered an earnings surprise with 1Q21 consolidated revenue of KRW2.18tn (+37.5% YoY) and OP of around KRW1tn (+64.7% YoY, 45.9% OPM) beating both market consensus and our estimate by wide margins (our estimate being far higher than the market consensus). EBT also beat the market consensus by a wide margin on the back of solid OP as well as around KRW100.0bn in one-off gains from the disposal of property (e.g., Buho building in Seocho-dong, Seoul and a stadium in Guri-city, Gyeonggi Province).
Surge in revenue and profits driven by brisk earnings at associates accounted for using the equity method
A stream of stellar 1Q21 earnings results by key associates accounted for using the equity method had raised hopes that LG Corp. would deliver an earnings surprise. LG Electronics reported record earnings results for 1Q21, thanks to the rise in display panel prices. LG Chem also delivered an earnings surprise thanks to wider spreads for petrochemical products as well as battery profitability improvements. Meanwhile, LG Uplus turned in record earnings on the back of stronger influx of 5G subscribers and curb in marketing expenses.
Marked earnings improvements at consolidated subsidiaries (LG CNS, S&I Corp.)
Earnings at consolidated subsidiaries such as LG CNS and S&I Corp. also improved substantially. LG CNS’s OP more than doubled YoY on ramped-up smart logistics and cloud businesses, while both revenue and OP at S&I Corp. climbed on the back of facilities investments by affiliates at home and abroad (e.g., capacity ramp-up at LG Display’s factory in Paju). We expect such positive factors to bolster LG Corp. shares going forward.