Significantly Undervalued Relative to Earnings Scale
The author is an analyst of KB Securities. He can be reached at yc.baek@kbfg.com. -- Ed.
Raise target price to KRW364,000
We maintain BUY on Kumho Petrochemical and raise our TP by 7.1% to KRW365,000 to reflect our improved earnings outlook. Specifically, we revised up 2021E/2022E NP (attributable to controlling interests) by 107.4%/56.4% based on surging synthetic rubber prices (e.g., NB-latex, SBR) and improving phenol derivatives margins. Of note, the change in TP is significantly smaller than our revision to earnings because our 5y ROE forecast was cut 3.12pp based on 2024E/2025E NP (attributable to controlling interests) being lowered by 11.5%/36.2% (synthetic rubber capex should push down prices).
2Q21 preview: Earnings to be in line with market consensus
We forecast 2Q21 revenue at KRW2.99tn (+104.5% YoY, +13.2% QoQ) and OP at KRW750.9bn (+525.1% YoY, +22.6% QoQ), in line with the market consensus (KRW766.1bn; FnGuide, Jul 5). In particular, Synthetic Rubber revenue/OP should reach KRW821.8bn (+7.3% QoQ)/KRW353.4bn (+21.0% QoQ). Earnings growth should be catalyzed by rising prices for NB-latex (+7.3% QoQ) and SBR (+8.0% QoQ). Meanwhile, phenol derivatives OP should balloon 60.0% QoQ to KRW308.9bn (44.7% OPM) on a 41.8% QoQ surge in BPA prices.
Significantly undervalued relative to earnings scale
The stock has been bearish since May on fears earnings will deteriorate in 2H22. In fact, the price trends of NB-latex and its feedstock suggest OP will plunge 28.9% QoQ in 3Q21. While this indicates earnings momentum will fade, these concerns hinder a fair valuation based on the company’s earnings scale. Specifically, 2022 OP is forecast at KRW1.62tn (-31.5% YoY) while the stock trades at just 2022E 7.8x P/E, 1.76x P/B. Furthermore, the projected dividend yield of 5.5% suggests the stock is significantly undervalued.