Wound Dressing Production Capacity to Increase by 50% in 4Q
The authors are analysts of Shinhan Investment Corp. They can be reached at shawn1225@shinhan.com and jhwon@shinhan.com, respectively. – Ed.
Record high exports in August raise 3Q21 earnings expectations
T&L’s wound dressing exports amounted to USD3.33mn (or KRW3.96bn, +36.3% MoM, +758.2% YoY) in August, setting a new monthly high since June (USD2.68bn), according to the data released on September 15. The figure was in line with the August order backlog of KRW3.9bn disclosed in the company’s semi-annual report. Combined order backlog for the first three quarters stands at KRW9.42bn, of which 70.4% was attained in July-August. T&L stated in its disclosure that September order backlog will reach KRW2.61bn, down slightly from July and August, due to fewer business days as a result of the Chuseok holidays.
3Q21 preview: Sales of KRW20.3bn, operating profit of KRW8.9bn
We expect T&L to post 3Q sales of KRW20.3bn and operating profit of KRW8.9bn (operating margin of 43.7%), based on robust exports seen through August and the order backlog for September. Sales of orthopedic external fixators are forecast to be similar to the previous quarter at KRW2bn, while those of wound dressing products will likely increase by 20.1% QoQ to KRW16.8bn. Wound dressing exports, a key driver of earnings growth, should come in at KRW11.2bn. Our estimate does not seem unreasonable considering actual sales, export clearance, and the gap with overseas order backlog. Strong profit gains are driven by operating leverage effect kicking in from 2Q and steep improvement in gross margin from a drop in outsourcing costs for packaging.
Excessively undervalued given capacity expansion and favorable market conditions
We retain our BUY rating on T&L for a target price of KRW80,000 (54.1% upside). Shares are currently trading at 2022F PER of 13.2x, about a 42% discount to the average PER (23x) of domestic medical aesthetics peers. Concerns over earnings slowdown have weighed down on medical aesthetics stocks after the 2Q earnings season due to the delta variant’s spread in 3Q. However, T&L’s mainstay trouble care patches, which are sold in the B2C market, have remained largely unaffected. Earnings are forecast to continue on a steep growth track given that products are still delivered more than three months after orders are placed amid high demand and wound dressing production capacity will increase by 50% from current levels in 4Q. Moreover, the company is expected to diversify its market from the US (partnership with Hero Cosmetics) to Europe and Asia after the facility expansion. We therefore see no reason for T&L shares to be undervalued vs. peers.