KOSPI 4Q Earnings Forecast Downgraded... Down 6.3% from a Month Ago

One-time Cost Year-end Reflection Accounting Practice Increases Gap with Actual Performance
Expectations Lowered but 4Q May Achieve Record High Results

On the afternoon of the 21st, when the KOSPI fell close to 1%, an employee passed in front of the index board in the dealing room of Hana Bank in Jung-gu, Seoul. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] As the earnings announcements for listed companies in the fourth quarter of last year have begun, earnings forecasts for KOSPI-listed companies are being revised downward. However, there is also analysis suggesting that the fourth quarter could record the highest earnings ever.

According to FnGuide, a financial information analysis firm, as of the 21st, the market consensus for operating profit on a consolidated basis for 165 KOSPI-listed companies, whose earnings were forecasted by four or more securities firms, was 48.5685 trillion KRW for the fourth quarter of last year. This represents a decrease of about 6.3% compared to the estimate of 51.8127 trillion KRW one month earlier.

The lowered expectations appear to be due to Samsung Electronics, the leading company in the domestic stock market, posting preliminary results that fell short of market expectations. On the 7th, Samsung Electronics announced preliminary results for the fourth quarter of last year with consolidated sales of 76 trillion KRW and operating profit of 13.8 trillion KRW. These figures represent increases of 23.48% and 52.49%, respectively, compared to the same period last year. However, the operating profit was about 8% lower than the consensus estimate of 15 trillion KRW. This is interpreted as being influenced by the inclusion of a one-time special incentive payment.

As a result, the annual operating profit for last year increased by 43.29% year-on-year to 51.57 trillion KRW, achieving the third highest record ever. However, it still fell short of the consensus estimate of 52 trillion KRW.

However, the fourth quarter typically includes one-time expenses such as bonuses. Actual earnings tend to fall short of consensus estimates by a larger margin than in other quarters. Lee Chang-hwan, a researcher at Hyundai Motor Securities, explained, "Considering past patterns, the fourth quarter generally shows a downward trend in earnings forecasts, so this is not a particularly significant situation. Especially because the fourth quarter reflects the accounting practice of including accumulated one-time expenses for the year, the possibility of an earnings shock is very high, making further downward revisions of forecasts inevitable."

In fact, according to FnGuide, the downwardly revised consensus for fourth-quarter operating profit of KOSPI companies still represents a 54.6% increase compared to the same period last year.

The trend of earnings improvement is clear. Major companies that posted losses in the fourth quarter of last year, such as SK Innovation, Amorepacific, Hotel Shilla, SeAH Besteel, Kangwon Land, Green Cross, Korea Aerospace Industries, and Hyundai Heavy Industries Holdings, are expected to turn profitable.

Nevertheless, the forecasts have decreased. SK Innovation’s consensus for operating profit and net profit were lowered by 6.5% and 13.5%, respectively, to 689.4 billion KRW and 398.7 billion KRW compared to one month ago. Amorepacific and Hotel Shilla also saw their operating profit forecasts reduced by 18.5% and 6.4%, respectively, compared to a month earlier.

Researcher Lee analyzed, "Although margins are expected to decline significantly compared to the third quarter, which recorded the highest quarterly earnings ever, it is positive that there is a possibility of breaking the record for the highest fourth-quarter earnings, surpassing the fourth quarter of 2017."