Efforts to Focus on Reinforcing Fundamentals
The author is an analyst of KB Securities. She can be reached at leesunhwa@kbfg.com. -- Ed.
Initiating coverage with BUY and TP of KRW110,000
We initiate coverage of Kakao with a BUY rating and target price of KRW110,000 (52.4% upside). We forecast 2022E-2024E OP CAGR of 36.2%. Derived using the DCF model, our TP is based on 9.16% WACC (9.40% COE, 2.61% after-tax COD, 0.96 52w adj. beta) and 3.22% terminal growth rate (3m avg. 30y KTB yield), and implies 50.3x 12m fwd P/E and 4.1x P/B.
Investment highlights
Investment highlights for Kakao include: (1) expansion of advertising and commerce businesses via utilization of its 50mn KakaoTalk user profiles; (2) introduction of interest-based search ads to its open chat service (9mn daily active users) within the year; (3) shift in strategic focus for the company’s Story division from aggressive marketing for overseas expansion toward structural improvements in profitability; and (4) active investment in new growth businesses (i.e., Kakao Enterprise, Kakao Brain, Ground X, Kakao Healthcare). Such efforts should lead to 2022E-2024E revenue CAGR of +16.7% and OP CAGR of +36.2%, higher than the +8.6% and +18.4% expected for the KRX300 Communication Service Index.
Following aggressive top-line growth, efforts to focus on reinforcing fundamentals
Over the past five years (2017-2021), Kakao has achieved sharp growth in its top line, with revenue registering +32.8% CAGR. OP, meanwhile, recorded +37.7% CAGR, as investments for aggressive business expansion undermined operating leverage. Now, Kakao plans to reinforce its fundamentals, focusing on the value of KakaoTalk and on boosting profitability by improving the efficiency of its marketing spend.
Risks: (1) Parent-subsidiary listing; (2) Economic recession
Risks include: (1) the potential for a holding company discount upon the listing of key subsidiaries; and (2) slowdown in growth of advertising and commerce markets upon an economic recession.