[Click eStock] "KT&G to Show Full-Scale Export Recovery from Second Half"

[Asia Economy Reporter Eunmo Koo] Korea Investment & Securities forecasted that KT&G's second-quarter earnings this year will meet market expectations and that a full-scale export recovery will take place from the second half of the year. The investment opinion and target stock price were maintained at 'Buy' and 107,000 KRW, respectively.

On the 15th, Korea Investment & Securities expected KT&G's consolidated sales for the second quarter of this year to increase by 2% year-on-year to 1.29 trillion KRW, and operating profit to decrease by 3% to 385.5 billion KRW, in line with market expectations. During the same period, separate sales were estimated to increase by 7% to 868.7 billion KRW, and operating profit to increase by 1% to 344 billion KRW. KGC (Korea Ginseng Corporation) was expected to see sales and operating profit decline by 11% and 26%, respectively, year-on-year due to sluggish duty-free channel sales of products such as red ginseng.

Domestic cigarette sales in the second quarter recorded 474.5 billion KRW, down 3% year-on-year, which was a better-than-expected performance considering the sluggish duty-free sector. Researcher Lee Jung-eun of Korea Investment & Securities explained in a report on the day, "Total domestic cigarette demand increased following the first quarter," adding, "Sales of Lil Hybrid 2.0 expanded nationwide, and convenience store channel sales increased due to the emergency disaster relief fund effect." Export cigarette sales in the second quarter were expected to decline by 5% to 179.4 billion KRW due to weakness in new markets such as Southeast Asia, Africa, and Latin America, despite recovery in the Middle East region. However, the real estate sector, a steady source of income, was projected to increase by 69% year-on-year, offsetting the decline.

The export cigarette sector is expected to show a full-scale recovery from the second half of the year. Researcher Lee said, "The cigarette export amount in June increased by 46% year-on-year, especially with Middle East exports surging by 677%, reflecting the visibility of contracts with local agents in the Middle East signed last February," adding, "Middle East exports in the second quarter are expected to reach last year's level, and the base effect will begin to appear in earnest from the second half."

She continued, "Concerns over sluggish Middle East exports, which suppressed the stock price throughout last year, have been resolved, but the weakness in new markets is regrettable," and forecasted, "Due to COVID-19, countries in Latin America and Africa closed their borders, causing logistics disruptions, resulting in a continuous decline in new market exports since March this year. However, as border closures are gradually lifted, recovery in the export cigarette sector is expected to be possible as we move into the second half."