[Click eStock] "KT&G, Additional Downside Risk Limited"

Kiwoom Securities Report

[Asia Economy Reporter Minji Lee] Kiwoom Securities maintained a buy rating and a target price of 103,000 KRW for KT&G on the 6th. Although the company posted disappointing results in the second quarter, it is expected to have long-term dividend appeal and growth potential in the NGP (Next Generation Products) business.

KT&G's operating profit in the second quarter was 330.1 billion KRW, down 16% year-on-year, significantly missing market expectations. This was due to underperformance across all business divisions. On a standalone basis, KT&G reported sales of 950.9 billion KRW and operating profit of 326.4 billion KRW, representing a 5% increase in sales but a 12% decrease in operating profit compared to the same period last year. Despite increased sales from HNB and real estate, operating profit margin fell by 6.4 percentage points year-on-year due to sluggish sales in the Middle East and tobacco exports, a decline in the KRW-USD exchange rate, and increased selling and administrative expenses.

On a standalone basis for KGC, sales decreased by 7% to 259.3 billion KRW, and operating profit dropped 68% to 6.5 billion KRW. Kiwoom Securities analyst Sangjun Park explained, “There was a negative base effect in road shops due to last year’s disaster relief fund disbursement,” adding, “Operating profit margin fell by 4.7 percentage points as channel mix and sales price deteriorated due to weak duty-free store sales.” In the other and adjustment segment, despite an 18% increase in overseas tobacco corporation sales compared to the previous year, operating profit declined by 7.5 billion KRW year-on-year due to increased marketing expenses of overseas tobacco corporations and poor performance of other subsidiaries.

Analyst Sangjun Park said, “Although the second-quarter results fell short of market expectations, the exchange rate is rebounding and the base effect in the duty-free channel is beginning to materialize, so the risk of further downward revisions to earnings estimates is not significant,” adding, “Domestic tobacco market share is also increasing, and sales of NGPs both domestically and internationally are steadily growing.”

However, a decline in real estate business profits due to reduced sales from the Suwon site is expected to be unavoidable for the time being. Park noted, “While the appeal of high-dividend stocks remains valid, the long-term recovery of core business fundamentals and the growth potential in the NGP business are positive factors.”