To Focus on Profitability in 2022
The author is an analyst of KB Securities. She can be reached at leesunhwa@kbfg.com. -- Ed.
Lower TP by 9.1% from KRW110,000 to KRW100,000; Maintain BUY
We maintain BUY on KT&G, but lower our TP by 9.1% from KRW110,000 to KRW100,000. The completion of pre-sales for the first Suwon Hwaseo Park Prugio apartment construction project in August 2021 and a temporary suspension of traditional cigarette sales in the U.S. in December 2021 should depress related revenue. Accordingly, we have revised down 2021E-2023E OP CAGR from 7.8% to 6.7%, resulting in the downward TP revision. However, we reiterate our BUY call given market share expansion in the global next-generation product (NGP) market, solid tobacco demand in Korea and expectations for a sharp recovery in sales at KGC on the potential easing of travel restrictions.
4Q21E OP of KRW279.4bn (-17.0% YoY), in line with consensus
We estimate 4Q21E consolidated revenue of KRW1.25tn (-6.4% YoY, -20.0% QoQ) and OP of KRW279.4bn (-17.0% YoY, -34.1% QoQ; 22.3% OPM) with OP meeting consensus of KRW293.4bn.
Stand-alone earnings: Robust cigarette sales in domestic and overseas markets; Sluggish cigarette exports to the Middle East; Lower real estate revenue
Domestic sales of both traditional and heat-not-burn (HNB) cigarettes should grow on robust demand. Revenue at overseas subsidiaries should continue to be strong thanks to robust sales in the U.S. and Russia, though exports of traditional cigarettes to the Middle East have been sluggish amid the pandemic. The number of NGP export destinations via Philip Morris International (PMI) increased by 11 in 4Q21, pushing up the total number of market additions for 2021 to 22 (vs. KT&G target of 10). Meanwhile, real estate revenue is projected to contract 48.2% YoY as recognition of revenue from the first Suwon Hwaseo Park Prugio project pre-sales has come to an end as of August 2021.
KGC: Strategic distribution channel restructuring and ongoing DFS channel slump
Revenue at KGC should continue to deteriorate due to the ongoing sales slump at the DFS channel amid the spread of the COVID-19 Omicron variant and the restructuring of low-margin sales channels in a strategic effort to streamline and optimize distribution.
To focus on profitability in 2022
For 2022, revenue is forecast to decline by KRW420.0bn (4.2% of 2021E revenue) due to the completion of revenue recognition from the first Suwon Hwaseo Park Prugio project and the suspension of traditional cigarette sales in the U.S. However, aggressive penetration in the global NGP market and KGC’s revenue recovery should support profitability-driven growth next year.