Top Pick among Internet Sector Players
The author is an analyst of NH Investment & Securities. He can be reached at jaemin.ahn@nhqv.com. -- Ed.
Since listing its subsidiaries is not its end-goal but rather a step towards growth, securing funds through IPOs is to increase the Kakao’s platform value and overall EV.
Listing of subsidiaries to provide opening to increase EV
- Adhering to a Buy rating, we raise our TP on Kakao from W140,000 to W190,000, continuing to offer it as our top pick amongst internet sector players. Talk Biz (branches over advertising, commerce) continues to expand, and earnings growth at Kakao’s mobility, pay, webtoon, and media domains is also worth noting. Kakao’s platform value is set to rise further on the back of new businesses, including Kakao View, Kakao Wallet, Kakao T Quick (quick delivery service), and content production, all of which are gradually delivering tangible results.
- With IPOs for some of Kakao’s subsidiaries now in full motion (Kakao Games listed in 2020; Kakao Bank: Aug 6, 2021), there are some market concerns over the applying of a discount rate to Kakao’s EV, a factor which is weighing upon the company’s share price. But, we believe that subsidiary listings will prove to be beneficial for Kakao’s EV, noting: 1) it still has several subsidiaries yet to be listed, including Kakao Pay, Kakao Entertainment, and Kakao Mobility; 2) the funds secured through IPOs should lead to further growth; and 3) listed subsidiaries’ share price may increase significantly after their listings, as seen in the cases of both Kakao Games and Kakao Bank.
- We calculated our new TP of W190,000 based on EV of W83tn by applying an SOTP valuation of the company’s major business divisions, and we have adjusted the base year applied for our TP from 2021 to 2022.
Earnings satisfy expectations if excluding one-off costs
- Kakao posted consolidated 2Q21 sales of W1.35tn (+41.9% y-y, +7.5% q-q) and OP of W162.6bn (+66.3% y-y, +3.2% q-q), with OP missing both our estimate of W182.1bn and consensus of W179.3bn. If stripping out one-off expenses of W12.1bn related to stock options, earnings arrived largely in line with expectations. Furthermore, Kakao is showing even sales growth across all of its businesses arms, including Talk Biz (solid performances from Kakao Biz Board and Talk Channel) and the firm’s webtoon, mobility, and pay service arms.