[Click eStock] "LG Sangsa, Disappointing Earnings Despite Logistics Surprise"

2Q Operating Profit Down 40% YoY
Trading Company Performance Deteriorates... "Difficult to Rebound Without Raw Material Price Improvement"

[Asia Economy Reporter Minwoo Lee] LG Sangsa's second-quarter earnings fell short of market expectations. Although logistics performance improved significantly, it could not escape the impact of the deterioration in trading performance.

According to industry sources on the 23rd, LG Sangsa announced yesterday that it recorded sales of 2.3073 trillion KRW and operating profit of 30.2 billion KRW in the second quarter of this year. Compared to the same period last year, sales decreased by 11.8% and operating profit by 40.3%. Compared to market consensus, these figures were 9.4% and 19.2% below expectations, respectively. Yuje-seon, a researcher at Hana Financial Investment, said, "Logistics performance improved significantly, but the decline in trading performance made poor results inevitable," adding, "If raw material prices and trading market conditions do not improve in the second half, most of the annual operating profit is expected to come from logistics, and the recovery of trading operating performance will be a key factor in improving return on equity (ROE)."

In particular, the trade market downturn caused significant weakness in the industrial goods and solutions sectors, which are major revenue sources. Sales in the second quarter were 900.1 billion KRW, down 27.3% from the same period last year. Operating profit, which was 9.5 billion KRW in the second quarter of last year, turned into an operating loss of 4.9 billion KRW. This is analyzed to be due to the deterioration of the oil market and a decrease in IT trading volume. The energy and palm sectors also showed weakness. Despite increased production, palm oil continued to incur losses, and coal losses expanded due to the weak price of thermal coal for power generation. Although the increase in production at the Indonesia GAM mine is effective, if there is no meaningful recovery in raw material prices, poor performance is expected to continue in the second half.

On the other hand, based on stable affiliate volumes, logistics sector sales recorded 1.0864 trillion KRW, a 1.2% increase from the same period last year. Operating profit during the same period was 43.8 billion KRW, up 20%. This was due to an increase in high-margin air cargo volume and seasonal demand for installation logistics, which increased storage and delivery (W&D) volumes.

While the recovery of trading performance is important, it is pointed out that it inevitably depends on raw material price trends. Researcher Yu said, "Despite decreases in air logistics and group company facility logistics in the second half, logistics performance is expected to continue improving compared to the previous year," adding, "Additional performance upgrades must come from existing trading, but energy and palm depend on the prices of thermal coal for power generation and palm oil, and industrial goods and solutions depend on oil price trends, so whether indicators improve in the second half is a critical situation."

Against this backdrop, Hana Financial Investment gave LG Sangsa a 'Buy' investment rating with a target price of 18,000 KRW. The closing price on the previous day was 15,450 KRW.