Winding Down of Pandemic to Lead to Increased NGP Exports

The author is an analyst of KB Securities. She can be reached at leesunhwa@kbfg.com. -- Ed.  

 

Maintain BUY, but raise target price 5.3% to KRW100,000     

We raise our TP by 5.3% (KRW95,000→KRW100,000) on KT&G to reflect upward revisions to 2022E/2023E OP of 6.6%/9.1%. As the pandemic winds down, top-line growth should be fueled by rising export volume and overseas next-generation products, especially in Europe, where e-cigarette stick ASP is high. We maintain BUY because KT&G’s expanding share of the global NGP market (third highest) and KGC’s sharp post-reopening recovery. 

1Q22 OP of KRW333.0bn (+6.3% YoY) in line with market consensus     

1Q22 consolidated revenue/OP came in at KRW1.40tn (+16.1% YoY, +12.4% QoQ)/KRW333.0bn (+6.3% YoY, +17.4% QoQ; 23.7% OPM), with OP in line with the consensus of KRW312.5bn (diff. of 6.6%). Exports of manufactured cigarettes are rising despite U.S. withdrawal. The no. of countries for PMI-type NGP exports is steadily rising. 

Standalone earnings: Drop in real estate revenue; leader of domestic NGP market   

Despite a drop in real estate revenue, Standalone revenue/OP rose 11.5% YoY/10.0% YoY on continual NGP growth at home/abroad; KT&G reached the top of the domestic HNB market (45.1% M/S), beating PMI; stick sales volume keeps rising overseas as well. 

KGC: Strategic restructuring of sales channels; sluggish DFS channel   

KGC reported a 1.6% YoY decline in revenue. The DFS channel continues to struggle amid the spread of Omicron. OP tumbled 35.8% on preemptive marketing spending in anticipation of the post-COVID period.   

Winding down of pandemic to lead to increased NGP exports, recovery at KGC

KT&G stock recently underwent correction amid sluggish exports to the Middle East and the U.S. withdrawal. However, it now appears to be gaining steam as exports recover and global NGP export coverage expands. For KGC, we expect a recovery in the DFS channel, as inbound travelers became exempt from mandatory self-isolation rules on Mar 21. 

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