New Business Expansion Centers upon Healthcare & Wellness
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
We positively view Lotte Corp’s continual new business investment expansion efforts and ongoing earnings improvement at affiliates. However, the IPO for Hotel Lotte and the creation of an integrated holding company are both still being delayed. Currently, Lotte Corp is trading at a 40% discount to NAV, resulting in a lack of valuation merit compared to other major holding companies.
New business expansion centers upon healthcare & wellness; earnings upping at retail affiliates
We believe that earnings are continuing to strengthen at Lotte Corp’s retail affiliates, including Lotte Shopping. Efficiency between affiliates is being strengthened via developments such as both Korea Seven’s acquisition of Ministop and the Lotte Confectionery-Lotte Foods merger. New business investment is being expanded, including establishment of Lotte Healthcare and Lotte Biologics, and Lotte Corp’s ‘Silver Towns’ retirement community venture.
However, dividend income this year is to be weighed upon by sluggish business conditions for Lotte Chem, the largest contributor to dividend income among Lotte Corp’s affiliates. There is some possibility that the firm might cancel treasury stocks (32.5%, W1.2tn) to boost shareholders’ return. But, the likelihood of such seems low given its focus on new business investment. Moreover, resumption of IPO activity for Hotel Lotte and the formation of an integrated holding company are both still being delayed.
Although maintaining a Hold rating, we raise our TP from W32,000 to W36,000, reflecting changes in listed affiliates’ share prices, the likely cancellation of some preferred treasury shares, and a lessened discount rate on new business investment.
2Q22 preview: Earnings improving for retail arm, but still tepid at chemical domain
We forecast 2Q22 sales of W3.237tn (+29% y-y) and OP of W67.5bn (-18% y-y).
Earnings at Lotte Chem likely remained weak due to regular maintenance, lofty raw material prices, and languid demand for products. But, Lotte Shopping should show y-y earnings improvement thanks to higher department stores earnings in line with the ending of social distancing rules. Korea Seven and GRS are also expected to report stronger sales (y-y).
Looking at 3Q22, we foresee OP of W115.2bn (+11% y-y), helped by both the ongoing earnings improvement at retail affiliates and a likely upswing in Lotte Chem’s earnings thanks to an anticipated easing in raw material cost burden as well as a likely strengthening in demand.