Profitability to Improve Gradually on ASP Hikes
The author is an analyst of NH Investment & Securities. She can be reached at mj27@nhqv.com. -- Ed.
Dongwon F&B’s 4Q21 OP shows a 20% y-y drop. Brisk earnings growth at subsidiary Dongwon Home Food stands out, but margins at the general food division were under pressure due to increased costs. However, with the company having hiked ASPs for most of its products, profitability should recover gradually.
Profitability to improve gradually on ASP hikes
We maintain a Buy rating and a TP of W270,000 on Dongwon F&B. With the firm having boosted ASPs for most of its products, including canned tuna, its margins should stabilize gradually, with profit spreads set to improve amid a period of raw material price drops. Of note, the price of tuna rose to US$1,700/ton in January, but further rise has been limited since that time. Subsidiary Dongwon Home Food succeeded in passing on increases in raw and subsidiary materials costs to prices, achieving eye-catching earnings growth as a result. Going forward, Dongwon Home Food is to drive overall earnings momentum. Currently trading at a 2022E P/E of 6.5x, Dongwon F&B’s shares appear excessively undervalued.
4Q21 review: Dongwon Home Food showing earnings growth across the board
Dongwon F&B posted consolidated 4Q21 sales of W880bn (+21.3% y-y) and OP of W15.5bn (-20.4% y-y), with OP missing consensus due to cost increases.
Non-consolidated (general food): We estimate sales of W391.1bn (+1.0% y-y) and OP of W7.5bn (-26.8% y-y). When stripping off the effects from the spin-off of the online business, sales are estimated to have grown 5% y-y. Cost burden temporarily increased due to a y-y jump in the price of tuna (US$1,350/ ton → US$1,600/ton), and profitability was sapped by higher SG&A expenses (including for logistics).
Subsidiary Dongwon Home Food (seasonings/sauces): We estimate sales of W420.3bn (+29.3% y-y) and OP of W10.3bn (+4,739% y-y), with earnings growth being witnessed across all divisions, including foodstuff (+30% y-y), Geumcheon (+30% y-y), Samjo Celltech (+10% y-y), and restaurant/catering (+8% y-y). Accordingly, its OP reached W10bn for the first time on a quarterly basis, even though some incentives that were not present in the previous year were reflected.
Dongwon Farms (feed): Sales continued to decline due to de-marketing to low-profit customers, with the subsidiary turning a loss due to pressure from rising costs, including higher grain prices.