The writer is an analyst of NH Funding & Securities. She may be reached at email@example.com. — Ed.
Abroad subsidiaries’ 2Q20 earnings are prone to are available sluggish as a result of Covid-19 pandemic. Nonetheless, we imagine that the agency’s fundamentals stay intact. Margins have been bettering on the home division, backed by new product rollouts, SKU streamlining, and offline retailer downsizing.
Home and abroad earnings to enhance and uncertainties to ease over mid/long run
Whereas reiterating a Purchase score, we decrease our TP on Lotte Confectionery from W200,000 to W135,000. The switch of its core abroad subsidiaries (in Kazakhstan, Europe, and Pakistan) from Lotte Corp to Lotte Confectionery final yr was anticipated to result in a pointy rise in enterprise worth. Nonetheless, as a consequence of unfavorable foreign exchange charges, the incorporation results have been smaller than anticipated.
Extra lately, the Covid-19 pandemic has vastly disrupted manufacturing and distribution at abroad subsidiaries. That mentioned, whereas earnings at abroad subsidiaries have been affected by exterior variables since final yr, their fundamentals stay intact. And, as soon as the Covid-19 pandemic subsides, meals demand will probably enhance of their respective markets. We word that with its takeover of abroad subsidiaries having been accomplished, further capital enhance or money outflow occasions are unlikely.
Lotte Confectionery ought to guide 2Q20 consolidated gross sales of W535.2bn (-1.9% y-y) and OP of W27.7bn (+1.2% y-y). Regardless of sound development at its nonconsolidated home enterprise, Covid-19-related harm at abroad subsidiaries is prone to restrict general earnings enchancment.
Regardless of sluggish snack gross sales at giant low cost shops, the home enterprise is to publish y-y gross sales and OP development, backed by: 1) new ice-cream merchandise rollouts; 2) narrowing losses at Natuur Ice cream model; and three) better demand for well being merchandise. However, unfavourable occasions have unfolded at abroad subsidiaries as a result of Covid-19 disaster, together with a manufacturing unit shutdown in Kazakhstan in June, a short lived operation discontinuation in India’s snack plant in June, and a double-digit y-y drop in gross sales at Belgium (with the subsidiary turning to the pink from 2Q20). We word that the Pakistan subsidiary is prone to present y-y earnings enchancment due to a positive foreign exchange charge.