New Businesses to Drive Growth in Mid/long-term
The authors are analysts of Shinhan Investment Corp. They can be reached at snowKH@shinhan.com and wonyong.sim@shinhan.com, respectively. -- Ed.
Visible earnings improvement expected in 2H22 vs. 1H22
Lotte Data Communication stands to report gradual improvement in earnings for 2Q22 after posting sluggish results for 1Q22. Operating profit dropped 55% YoY to KRW5.1bn in 1Q22, due to SG&A hikes and weak subsidiary earnings. In contrast, overall earnings should clearly improve in 2H22 with order intake from group affiliates to rise in earnest. Earnings from the new electric vehicle (EV) charging station business are also likely to turn around in 2H22. As a result, company-wide operating profit should more than double to KRW29.2bn in 2H22from KRW11.4bn in 1H22.
2022 outlook: 1) Addition of non-captive clients; 2) subsidiary growth
Growth of the system integration (SI) business hinges on: 1) steady inflow of sales from group affiliates; and 2) increase in portion of non-captive clients. Lotte Data Communication generated an estimated 55% of sales from captive clients in 2021 vs. the 69% average of five domestic SI peers. With orders flowing in from clients in both public and private sectors, the company is expected to achieve higher earnings growth than peers. We also hold an upbeat outlook on capacity utilization improvement from data center expansion, as well as growth of new businesses.
The shift to the fourth industrial revolution continues to drive demand for cloud computing, big data and security solutions, and facility investments delayed by the pandemic are set to rapidly resume. Leveraging on advanced technology needed to secure market foothold in the SI industry, plus a solid track record in public and private projects, Lotte Data Communication's SI division is expected to deliver notable growth in the long run. For full-year 2022, SI sales are forecast at KRW853.3bn (+10% YoY).
We also find the growth story intact for new businesses. EV charging station, metaverse and other new businesses stand to enjoy operational synergy with group affiliates, laying the foundation for further growth. Costs will likely increase in the near term, but profitability improvement backed by top-line growth should lead to a re-rating of shares going forward.
Retain BUY for a revised-down target of KRW41,000
Our target price for Lotte Data Communication is lowered by 18% to KRW41,000, based on 2022F EPS of KRW2,238 and a target PER of 18.5x (past 4-year average PER high). The downward-revision reflects the decline in peer valuations and down-adjustment of EPS forecasts. Nevertheless, we retain our BUY rating with new businesses (metaverse, infrastructure for self-driving cars) set to drive ample growth momentum in the mid/long-term.