KT&G, Will 'Lil' Exports Boost Corporate Value?

[Asia Economy Reporter Eunmo Koo] KT&G continues to experience sluggish stock performance following earnings that fell short of market expectations. Analysts suggest that the recovery of exports is key to a stock price rebound.

According to the Korea Exchange on the 17th, KT&G closed at 90,400 KRW on the 14th, down 1.95% (1,800 KRW) from the previous trading day. KT&G's stock price has been steadily declining since October last year. This year as well, it has continued a downward trend, hitting a 52-week low of 90,300 KRW during intraday trading on the 14th.

The earnings that fell below market expectations have been identified as the cause of the recent stock price weakness. KT&G's consolidated operating profit for Q4 last year was 251.8 billion KRW, a 4.6% decrease compared to the same period the previous year. This figure was below the market forecast of 299.7 billion KRW. During the same period, sales increased by 9.0% to 1.2007 trillion KRW, but net profit decreased by 9.5% to 114.7 billion KRW.

While the domestic market share for cigarettes increased positively, the decline in cigarette exports continued, and the poor performance of consolidated subsidiaries negatively impacted overall results. In Q4, the domestic conventional cigarette market share rose by 2.2 percentage points year-on-year to 64.1%, solidifying KT&G's dominant position. However, overseas sales declined due to weak exports in regions such as the Middle East, with sales volume and revenue falling by 7.8% and 2.6%, respectively. Among major consolidated subsidiaries, Youngjin Pharmaceutical recorded an operating loss due to increased R&D expenses and poor sales performance of key overseas subsidiaries, turning to a deficit.

Recovery of exports is considered crucial for a stock price rebound. Over the past two years, KT&G has sought growth through non-core businesses such as real estate sales amid sluggish cigarette exports, achieving limited profit growth through cost structure improvements and SG&A efficiency. For KT&G to grow centered on its core business this year, it is necessary to expand new market exports of heated tobacco products and recover the Middle Eastern market, among other export sector achievements. Eunjeong Park, a researcher at Yuanta Securities, stated, "Although recovery of Middle Eastern exports remains distant and domestic demand is expected to be weak due to COVID-19, the stock price will likely form a bottom in Q1 this year. However, if exports recover, gradual corporate value appreciation can be expected."

The recent overseas market entry of electronic cigarettes through Philip Morris International (PMI) is viewed as a positive strategic move. On the 29th of last month, KT&G signed a three-year overseas sales supply contract for the electronic cigarette 'lil' with PMI. Four types of products will be exported, with KT&G receiving royalties based on product supply. Jihyun Shim, a researcher at eBest Investment & Securities, commented, "PMI and KT&G are competitors in the heated tobacco market, but KT&G has sufficient alternative products to conventional cigarettes in the liquid-type electronic cigarette market, so there is potential for a 'win-win' situation."