Transparency Secured Following Shareholder Activism
The author is an analyst of KB Securities. She can be reached at leesunhwa@kbfg.com. -- Ed.
Maintain BUY and TP of KRW100,000
We maintain BUY and TP of KRW100,000 for SM Entertainment (SM). We expect 2022E-2024E OP CAGR of 22.9% for SM. Our DCF-based TP assumes 9.81% WACC (9.82% COE; 4.49% after-tax COD; 1.08 52w adj. beta), 2.1x EV/EBITDA exit multiple, and 2.30% implied terminal growth rate (from 2023E onwards). Our TP implies 25.4x 12m fwd implied P/E and 2.86x P/B, and offers potential upside of 61.6% (vs. Jul 1 close).
Loyal fandoms, potential for artist activity expansion via units, revenue diversification via platform businesses
We forecast 2022E-2024E OP CAGR of 22.9% for SM, given that: (1) the company, synonymous with the history of idol groups in Korea, boasts highly loyal fandoms that help to ensure strong album sales; (2) expansion of artist activity via units, not only intra-group but also inter-group, should create synergies; and (3) the company has been diversifying its revenue base with the addition of its platform businesses, operated by subsidiaries Beyond Live Corporation and DearU.
Transparency secured following shareholder activism
Despite the boost to enterprise value from the company’s artist management business as well as its subsidiaries’ platform businesses, shares in SM have traded at a discount due to a governance issue concerning its largest shareholder. Namely, SM was deemed to be paying an excessive amount of royalties to Like Planning, a production company owned by SM’s largest shareholder and executive producer, Lee Soo-man. However, in a move viewed to have improved management transparency, SM has recently appointed an auditor recommended by Align Partners Capital Management.
2Q22E OP of KRW20.1bn (-27.0% YoY), in line with consensus
We expect 2Q22E consolidated revenue of KRW182.5bn (-2.1% YoY, +7.7% QoQ) and OP of KRW20.1bn (-27.0% YoY, +4.4% QoQ; 11.0% OPM); our OP estimate is in line with the market consensus of KRW20.8bn. Album sales should be bolstered by NCT DREAM’s second repackaged album Beatbox, while growth is likely to have been sustained by NCT 127’s world tour in Japan. There is risk that there may be a lag of one to three months until financial settlements for the concerts in Japan are completed, however.