Strengthen Eco-friendly and Wellness Businesses
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
We expect LXI’s 4Q21 earnings to prove higher than consensus, helped by continued sound earnings momentum thanks to both high commodity prices and the partial reflection of peak seasonality for the firm’s logistics business. Positives to look forward to include LXI’s new green and wellness ventures, the possible listing of LX Pantos, and higher DPS.
Transitioning from coal business to eco-friendly and wellness businesses
LX International (LXI) is a major subsidiary of the LX Group. Backed by quickened earnings momentum at its coal and logistics domains, we expect the firm to: 1) pursue synergies under its new holding company structure; 2) strengthen its new eco-friendly and wellness businesses; and 3) enhance shareholder value.
We expect OP to total W649.5bn (+306% y-y) for 2021 and W634.5bn (-2% y-y) for 2022, noting high commodity prices and the firm’s bullish logistics business. We see 2021E DPS of W1,600 (+300% y-y). Based on increased cash flows from operations, the firm plans to invest around W300bn pa over the next four years. Moving ahead, concerns over the NPS’s possible exclusion of coal-related companies from its investment portfolios are to fade as LXI directs new investment towards green projects such as carbon credit and nickel businesses; and 2) expansion of a coronavirus diagnostic kit distribution venture. The firm recently bought a 20% stake (worth W36bn) in a polybutylene adipate terephthalate (PBAT) venture—production is slated to begin from 2024.
4Q21 preview: To show further sound earnings momentum
LXI should post 4Q21 sales of W4,129bn (+23% y-y) and consensus-topping OP of W200.8bn (+348% y-y).
These anticipated robust earnings are to be led by the firm’s E&P business (4Q21E OP W111.9bn, TTP y-y). OP likely increased as coal prices (Indonesian coal: +29% q-q; Newcastle: +15% q-q) are still higher than in 3Q21 despite coal price adjustments following a sharp surge in early 4Q21. While sales have been deferred due to increased precipitation, healthy earnings likely sustained at the firm’s palm-oil business (OP of W5.7bn, +5600% y-y) in line with a continued palm-oil price rise (+18% q-q). We believe that although freight rate increase has slowed q-q, earnings have remained solid at the logistics arm (OP of W83.9bn, +168% y-y), helped by the partial reflection of peak seasonality (winter).
Coal prices have fallen following an especially strong surge in October, but remain 3x higher than the 2020 price averages. Winter seasonality is to usher in higher demand for coal. Earnings at LXI’s coal business should be solid next year (2022F OP: +12% y-y) in line with planned higher coal production at the Indonesian GAM coal mine (2022F: 12mn tons → 15mn tons).