The author is an analyst at KB Securities. She can be contacted at [email protected]. — Ed.
Target price 6% lower but still BUY given the 60% rise
Despite upward revisions to earnings estimates fueled by a strong recovery in department store margins, we are lowering our TP by 6% to KRW 340,000 on Shinsegae to reflect a lower EV/EBITDA multiple applied to the division. We maintain BUY as our TP maintains a 60% upside (compared to the August 24 close).
Grossly undervalued at 4.6x P/E given strong earnings momentum
Shinsegae looks grossly undervalued given its earnings momentum. Although Department Store reported record revenue and profit for a second consecutive year, the stock struggled, dropping to 4.6x 12m fwd P/E. We attribute the bearish performance to:
(1) concerns that buoyant department store sales are largely due to the pandemic and will lose appeal once outbound tourism picks up, and
(2) fears of lower consumer spending due to lower disposable income and a slowing economy.
Strong earnings growth in 2021-22 could weigh on performance in 2023, but we expect department stores to continue to grow rather than quickly lose momentum.
2Q22 Review: OP Exceeds Market Consensus by 41%, Department Stores and DFS Exceed Expectations
Shinsegae recorded in 2Q22 a gross turnover of 3.06 tn KRW (+32% YoY), a net turnover of 1.88 tn KRW (+35% YoY) and an OP of 187.4 billion KRW (+95% over one year). Net sales and OP exceeded market consensus by 7% and 41%, respectively.
(1) Department stores (stand-alone + subsidiaries) saw gross revenue increase by 41% (stand-alone SSSG +18%), with PO reaching KRW 121.1 billion (+131% YoY). Excluding Daejeon (opened in 3Q21) and Gwangju (consolidated in 4Q21) branches, gross revenue and OP increased by 20% and 95% respectively. Profit growth was fueled by spikes in sales of apparel, luxury goods and cosmetics.
(2) DFS exceeded expectations, recording gross revenue of KRW 870.3 billion (+5% vs. quarter) and OP of KRW 28.7 billion (+KRW 30.8 billion per quarter). The OP’s QoQ growth is the result of a jump in outbound tourist traffic and a reversal of inventory loss provisions.
(3) Casamia recorded a 41% year-on-year increase in revenue (number of stores +21%; price increases; dynamic sales for best-selling products) but recorded an operating loss of 4 .2 billion KRW (expanded loss of 1.0 billion KRW year-on-year) due to higher raw material prices and logistics costs.