[Click eStock] Lotte Food, Price Increased but...

[Asia Economy Reporter Junho Hwang] IBK Investment & Securities has downgraded the target price of Lotte Food to 440,000 KRW, forecasting a decline in profitability across all business sectors.

First, the estimated sales and operating loss for the fourth quarter of last year are 410.4 billion KRW and 2.9 billion KRW, respectively. The market consensus was sales of 402.4 billion KRW and operating profit of 1.5 billion KRW, which this estimate falls short of. The causes of profitability deterioration include rising input costs, a decrease in high-margin powdered milk exports, and one-time costs due to the suspension of the meat business.

The dairy/food ingredients division is expected to see increased sales of high value-added products such as butter and shortening, along with improved sales related to food ingredients. However, the cost burden increased due to a 10-30% rise in raw material prices such as soybean oil and palm oil compared to the previous year. Although product prices were raised, it was insufficient to fully offset the increase in costs.

The ice cream/dairy products division is expected to continue steady growth in scale, supported by expanded brand advertising for products like Pig Bar and a rise in consumer sentiment due to an increase in ice cream specialty stores. However, considering surplus raw milk inventory and a decline in high-margin powdered milk exports, the operating loss is expected to widen.

Kim Taehyun, a researcher at IBK Investment & Securities, stated, "Although a reduction in overall sales due to the suspension of the meat business this year is inevitable, considering the expansion of price-increased items, reduction in meat processing losses, and growth in baby food performance, the operating margin is expected to improve by 0.4%p (yoy), so we maintain a buy rating." However, he added, "Reflecting the revised 2022 earnings estimates and the lowered valuation across the industry, the target price is adjusted to 440,000 KRW (previously 540,000 KRW)."