Excessively Undervalued
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Dongwon F&B’s OP grew 27% y-y in 2Q21, meeting consensus thanks to normalized operations at subsidiary Dongwon Home Food, which had been hit hard by Covid-19. Believing that the firm’s shares are undervalued in light of its solid earnings trend, we recommend buying the dip.
Excessively undervalued, despite solid earnings trend
We maintain a Buy rating and a TP of W270,000 on Dongwon F&B. Both the general food and seasoning sauce divisions should continue to drive the firm’s overall earnings uptrend. In 3Q21, an earnings recovery at Dongwon Home Food (related to dining out) is likely to be slightly delayed due to the spread of the Delta variant. However, earnings at the processed food division should rebound.
Despite restrictions on fish aggregating device usage, the uptrend in tuna costs has been marginal, and so additional cost burden has been limited. The effects of ASP markups (to reflect rising cost burden) are to be felt from 2H21. As marketing expenses also concentrated in 2Q21, leverage effects are to increase in 2H21 on the back of sales growth. Given the solid sales and profit growth stemming from business diversification, a 12-month forward P/E of 7.8x seems excessively undervalued.
Consensus met thanks to Dongwon Home Food’s 2Q21 performance
Dongwon F&B posted consolidated 2Q21 sales of W810bn (+7.0% y-y) and OP of W20.9bn (+26.5% y-y), in line with consensus.
Parent basis (general food): 2Q21 sales are estimated at W389.1bn (-6% y-y) and OP at W10.2bn (-18% y-y), as earnings from the online division, which was spun off in 2Q21, were removed. Tuna can and livestock can sales saw negative growth due to high-base effects, and sales of processed dairy foods also suffered negative growth in the aftermath of boycotts against certain CVS brands, but HMR sales maintained double-digit growth.
Dongwon Home Food (seasoning/food stuff): 2Q21 sales are estimated at W338.3bn (+16% y-y) and OP at W9.7bn (+161% y-y). The business recorded record strong OP thanks to low base effect, higher sales of high-margin products at Samjo Celltech, and normalized demand for food materials (which reduced operating loss by more than W3bn).
Dongwon Farms (feed): The division turned to operating loss due to pressure from a rising expense burden, including grain costs.