[Click eStock] "Nexen Tire, COVID-19 Recovery Expected Amid Raw Material Cost Shock"

KB Securities "Target Price Raised to 6,000 Won... However, Investment Opinion Remains 'Neutral'"
Hit by Rising Prices of Synthetic and Natural Rubber

[Asia Economy Reporter Gong Byung-sun] There is a forecast that the rise in raw material costs could impact Nexen Tire. However, the recovery from the COVID-19 shock is expected to partially offset the impact.

On the 31st, KB Securities raised Nexen Tire's target stock price from the previous 6,000 won to 7,000 won. However, the investment opinion was maintained as 'Hold'. KB Securities has been using the recent 3-month average interest rate of the 30-year government bond as Nexen Tire's perpetual growth rate. As the assumed perpetual growth rate was raised from 1.6% to 2.0%, the target stock price also increased. The target price was calculated using the discounted cash flow (DCF) method, with a 12-month price-to-earnings ratio (P/E) of 8.8 times and a price-to-book ratio (P/B) of 0.41 times.

Nexen Tire's operating profit for the first quarter of this year is expected to decrease by 12.3% year-on-year to 22.2 billion won. This figure is 1.5 billion won (6.4%) below KB Securities' previous forecast. The rise in raw material costs was a factor in the decline in performance. The prices of synthetic rubber and natural rubber increased, raising the manufacturing cost of tires.

Accordingly, KB Securities forecast Nexen Tire's operating profit for this year at 122.7 billion won. This is 11.6% and 20.9% below the market consensus and KB Securities' previous forecast, respectively. Although the average selling price (ASP) assumption for tires rose by 10.5%, increasing sales by 71.1 billion won, it appears insufficient to offset the 126.6 billion won in costs due to rising raw material prices.

However, the recovery from COVID-19 is expected to partially offset the damage. The spread of COVID-19 vaccinations is leading to a recovery in tire demand, and the normalization of the Czech factory has become more likely. Kang Sung-jin, a researcher at KB Securities, said, “The expected factory operating rate for Nexen Tire this year is about 87.1%.”