[Click eStock] "Emart Faces Earnings Risk Amid Rising Prices... Target Price and Profit Forecast Lowered"

[Asia Economy Reporter Myung-hwan Lee] Samsung Securities announced on the 19th that it maintains a buy rating on Emart but lowers the target price by 20% from the previous 170,000 KRW to 135,000 KRW. This is due to the expectation that inflation-driven price increases are not being sufficiently reflected in consumer prices, which will negatively impact earnings.

Samsung Securities projects Emart's sales for the second quarter of this year to increase by 21% year-on-year to 7.08 trillion KRW, with an operating loss turning to 100 million KRW. The operating profit margin is forecasted to be 0.0%. Although the sales growth rate appears high due to the acquisition effects of Gmarket (eBay) and SCK Company (Starbucks), Samsung Securities estimates that the sales growth rate of existing businesses excluding these acquisitions was only around 3%. Furthermore, considering the inflation rate, this sales growth rate is not sufficient to offset the burden of rising costs.

Samsung Securities analyzes that the deterioration in the operating performance of Emart's existing businesses compared to last year likely caused the poor performance in the second quarter. It explains that the burden of rising prices is not being fully passed on to customers.

Samsung Securities also revised down Emart's full-year performance this year due to inflation. They expect that inflation will continue until the end of this year and that the burden will not be fully reflected in consumer prices. Samsung Securities forecasts Emart's sales this year to increase by 18% year-on-year to 29.3 trillion KRW, while operating profit is expected to decrease by 44% to 178.8 billion KRW. The operating profit margin is expected to decline by 0.7 percentage points to 0.6%. This represents a 1% downward revision in sales and a 35% downward revision in operating profit compared to Samsung Securities' previous forecast.

Emart's stock price is also showing a downward trend. The stock price has been declining since the fourth quarter of last year, and this year it has underperformed the KOSPI by 10%. The initial stock price adjustment was due to concerns over reduced dine-in demand following the reopening of economic activities and intensified e-commerce competition. However, Samsung Securities analyzes that macro risks are now dominating investor sentiment. There are concerns about the uncertainty regarding how much of the pain from inflation should be shared with consumers and how much consumption will contract during an economic downturn.

There is also a possibility that earnings could worsen further. Ji-ho Choi, a researcher at Samsung Securities, said, "The consensus for this year's operating profit, which was 640 billion KRW at the beginning of the year, has now fallen to 280 billion KRW, and further downward revisions are likely." He added, "Given that the stock price has fallen 40-50% from its previous peak and valuation pressure has eased, it is necessary to pay attention not only to pessimistic forecasts but also to optimistic changes at this point."