DFS Business Improving Rapidly
The author is an analyst of NH Investment & Securities. He can be reached at jooyh@nhqv.com. -- Ed.
HDS announced better-than-expected earnings in 2Q21, thanks to sound operations for The Hyundai Seoul and higher sales for imported cosmetics. Both The Hyundai Seoul and newly-opened DFSs should hit monthly BEP within the year, in turn boosting the firm’s share price momentum.
Initiate with Buy rating and TP of W105,000
We present a Buy rating and a TP of W105,000 for Hyundai Department Store (HDS). Our TP is derived by applying a target P/E of 12.0x to 12M FWD NP. Our target P/E is the average P/E over 2017~2018 for Shinsegae (which has a similar business model—ie, department store and DFS operations) when it started up its DFS business. Our TP offers 29% upside from HDS’s current share price of W81,500 (as of Sep 10).
New stores set to reach BEP faster than expected
HDS has made aggressive investments in offline stores since last year. It has opened one department store and two DFSs. Usually, the time required to reach the BEP is a year and a half for a department store, and it takes roughly two years for a DFS to turn profitable. However, despite the Covid-19 crisis, HDS’s new stores are predicted to turn profitable faster than expected.
The Hyundai Seoul, the largest department store in Seoul, is estimated to display sales of around W800bn, overachieving its target of W630bn set when it was opened. Accordingly, the branch is expected to achieve the BEP within less than a year after its debut. We positively view the fact that HDS is displaying both sound SSSG and profit improvement for new branches.
Despite concerns over the fallout from the pandemic, HDS’s DFS business is improving rapidly. In 2Q21, the DFS domain’s daily average sales rose to W7.0bn on higher sales for imported cosmetics. The business can turn profitable once daily average sales surpass W8.5bn. We anticipate that the business will reach monthly BEP in 2H21 and record an annual OP next year.