Earnings on Recovery Track

The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed. 

 

Lotte Corp’s earnings visibility should be restored in 2021 thanks to low-base effects and cost efficiency efforts. However, standing atop the Lotte Group’s governance structure, Hotel Lotte will likely delay its IPO as its sluggish earnings are expected to continue. Given such, the chances of a Lotte Corp-Hotel Lotte merger look slim for now. Lotte Corp’s shares are currently trading at 40% discount to NAV, lacking valuation merit compared to other major holding company players.

Earnings on recovery track; strengthening control over affiliates

Lotte Corp’s earnings visibility is being restored by low-base effects (stemming from the Covid-19 outbreak), restructuring of Lotte Shopping, normalized production facility operations at Lotte Chemical, and an ongoing global economy recovery. But, standing atop the Lotte Group’s governance structure, Hotel Lotte will likely delay its IPO as its earnings continue to face a hostile business environment. Given such, the chances of a Lotte Corp-Hotel Lotte merger (the end goal of the Lotte Group’s governance restructuring efforts) look slim for now.

Meanwhile, Lotte Corp continues to strengthen its control over major subsidiaries. After its acquisition of a 0.3% stake in Lotte Chemical in 2Q21, Lotte Corp participated in paid-in capital increase events for Lotte Chilsung, Lotte Food and Lotte International, upping its equity stakes in them by 1.9%p, 4.0%p, and 3.5%p, respectively. In line with earnings improvement at its subsidiaries, we expect Lotte Corp’s dividend income to expand for the first time in three years. Meanwhile, an upcoming IPO for Lotte Rental (IPO valuation band: W1.7tn~W2.2tn) is to highlight Hotel Lotte’s asset value.

2Q21 preview: Earnings recovery underway

Lotte Corp should post consolidated 2Q21 sales of W2,276.2bn (+9% y-y) and OP of W83.4bn (+75% y-y).

We mainly attribute the likely sound earnings to low-base effects (y-y) and earnings turnarounds for major subsidiaries, including Lotte Shopping and Lotte Chemical. Lotte Shopping’s OP for the quarter should come in above consensus on both reduced fixed costs (in the wake of restructuring) and continued robust department store sales. But, we believe that Lotte Chemical’s 2Q21 earnings will arrive slightly below consensus on both regular maintenance at its Daesan production facilities and a q-q narrowing in spreads for its major products.

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