Re-rating Imminent
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Maintain BUY, target price at KRW500,000; earnings surprise expected
We maintain BUY and TP of KRW500,000 on LG Innotek. We expect an earnings surprise in 1Q22 (low-demand season), on par with 3Q earnings (high-demand season), based on the following:
(1) An increase in specs expected for iPhone cameras
(2) Top-line growth at Substrate (OPM near 30%)
(3) Booms for the metaverse (MR headsets from Apple, Microsoft) and self-driving vehicles (Apple Car).
1Q22 forecast: OP of KRW334.8bn to exceed expectations
We revise up 1Q22E OP by 8% from KRW310.5bn to KRW334.8bn (vs. market consensus of KRW313.3bn), as OP should match 3Q21 OP (KRW335.7bn) despite low seasonality and approach the 1Q record of KRW346.8bn (set in 2021 with the delayed release of iPhone 12). 1Q22 revenue should reach KRW3.8tn, jumping 23% YoY; the strong YoY growth should propel 1H22 earnings to an all-time high (OP of KRW508.5bn).
Stock trading at 7.7x 2022E P/E, suggesting overblown concerns priced in
LG Innotek stock is down 15% from its last peak (KRW384,500 on Jan 14) on concerns over 1Q22 earnings and intensifying competition. However, we believe the concerns are overblown because the company is more likely to post an 1Q22 earnings surprise, and it has already been designated the supplier of iPhone cameras for 2022-23, with a strong chance of extending the deal given only a handful of companies are capable of meeting Apple’s required camera specs. We believe a re-rating is imminent, as the current stock price (7.7x 2022E P/E) suggests excessive concerns have been priced in.