[Click eStock] "KG Inicis 1Q Subsidiary Earnings Outlook Disappointing... Target Price Down"

[Asia Economy Reporter Myung-hwan Lee] Hana Financial Investment announced on the 20th that it is lowering the target price of KG Inicis from the previous 34,700 KRW to 25,700 KRW due to disappointing subsidiary performance. However, the investment rating was maintained as "Buy."

Hana Financial Investment projected KG Inicis's consolidated Q1 sales to increase by 7.1% year-on-year to 259.1 billion KRW, while operating profit is expected to decrease by 6.9% to 24.2 billion KRW. On a separate basis, sales are forecasted to rise 13.4% to 143.7 billion KRW, with operating profit declining 3.6% to 10.6 billion KRW compared to the same period last year.

Excluding the low base effect from the launch of Apple's new iPhone model and the opening of the Apple Store at Yeouido IFC Mall in Q1 last year, which caused a slight decrease in global merchant transaction volume, steady growth is expected across all sectors. However, the government’s triennial qualified cost reassessment issue is anticipated to pressure card companies to reduce fees, leading to a decline in the core business’s operating profit margin.

Among subsidiaries, KG Mobilians is expected to experience structural performance decline due to a slowdown in mobile payment volume following the reopening. KG EduOne is also forecasted to see a drop in performance due to sluggish sales caused by the policy to reduce teacher appointments. However, Hallys F&B is expected to offset the performance declines of other subsidiaries by posting a sales increase of 11.4% year-on-year to 28.2 billion KRW and turning to an operating profit of 500 million KRW in Q1 this year.

Hana Financial Investment’s forecast for KG Inicis’s 2022 sales is 1.1 trillion KRW, up 6.8% from last year, with operating profit expected to decrease by 8.6% to 103.4 billion KRW. Despite the performance slowdown of subsidiaries KG Mobilians and KG EduOne, growth in transaction volume focused on high-profit merchants such as global, small and medium-sized, and hosting merchants, along with recovery in on-tact merchant transaction volume, is expected to drive top-line growth. Hana Financial Investment estimates the company’s annual transaction volume for 2022 to increase by 19.2% year-on-year to 32.9 trillion KRW, expecting stable growth in its core payment business.

Researcher Jae-ho Choi of Hana Financial Investment stated, "We anticipate a multiple expansion phase driven by the explosive base effect of on-tact merchant transaction volume growth following the lifting of social distancing measures and expectations for new cryptocurrency business," but added, "We are lowering the target price reflecting the issue of reduced merchant fee rates for card companies and the structural performance decline of subsidiaries KG EduOne and KG Mobilians."

Researcher Choi further evaluated, "Excluding the impact of COVID-19, subsidiary Hallys F&B is a company capable of achieving an annual operating profit of 15.5 billion KRW in 2019," and predicted, "It is expected to significantly contribute to performance growth as reopening becomes more visible."