Qualitative Growth Expected in 2022
The author is an analyst of NH Investment & Securities. He can be reached at kyuha.lee@nhqv.com. -- Ed.
We raise our TP on LGI to reflect upwards revisions to our earnings forecasts and target P/E multiple. Qualitative growth is expected in 2022, led by increased market share and cost reductions. We believe that the company has entered the early stages of a mid/long-term valuation recovery cycle, benefiting from megatrends such as XR and autonomous vehicles.
Qualitative growth expected in 2022
We raise our TP on LG Innotek (LGI) from W400,000 to W500,000 and maintain a Buy rating. Our TP was calculated by multiplying 2022 EPS (up 13.9% from our previous estimate) by a target P/E of 13.2x (a 10% premium to our previous target P/E of 12x).
We increase 2022E EPS by 13.9% as: 1) the company’s market share has risen on competitors’ production disruptions and reliability issues; 2) margins have improved via cost reductions; and 3) other expenses have decreased on the closure of a low-profit division.
In terms of earnings performance, the firm should display qualitative growth in 2022. Top-line growth is expected on the back of market share expansion and rising ASPs. Also, cost reduction and margin improvement from increased production efficiency are expected to act as major earnings drivers. Moreover, the electronics division should report a successful turnaround, with earnings set to improve in earnest from 2H22.
Expect valuation recovery cycle
We predict that LGI will enter a mid/long-term valuation recovery cycle in 2022, with mega trends such as XR, folded zoom cameras, self-driving cars, foldable smartphones, and AR glasses set to continue through 2025.
Steep short-term share price rise and high earnings expectations are burdensome for the share price. However, given the company’s historic low valuations and excessively undervalued situation compared to global peers, we believe that the shares are in the early stages of a mid/long-term valuation recovery cycle.