"Cold Investor Sentiment" Leads to Consecutive Target Price Downgrades↓

[Asia Economy Reporter Park So-yeon] KB Securities has lowered the target price for Korean Air to 28,000 KRW, down 17.6% from the previous target. The investment rating remains a buy.

According to FN Guide on the 22nd, KB Securities stated in a recent report that despite the "hot long-haul passenger market," investor sentiment remains cold.

Reflecting the slowdown in the cargo business, operating profit forecasts for 2022 and 2023 were lowered by 11.7% and 6.1%, respectively. The target price was reduced by applying a weighted average cost of capital (WACC) that increased by 0.6 percentage points compared to before.

Korean Air's operating profit for the third quarter of this year is expected to reach 764.2 billion KRW, an 82.3% increase year-on-year due to the recovery in international passenger demand. This exceeds the market consensus by 40.9% but falls short of KB Securities' previous forecast by 18.8%. International passenger traffic in the third quarter is expected to increase by 354.1% year-on-year, with additional revenue estimated at 924.8 billion KRW.

KB Securities analyzed that the air cargo market passed its peak starting from the second quarter of this year. The congestion at U.S. West Coast ports, one of the causes of the global logistics crisis, has been resolved, weakening the demand for urgent cargo transport that had shifted to air cargo. Additionally, due to inflation, year-end shopping demand in developed countries is expected to grow more slowly than usual. As demand slows and cargo aircraft load factors decrease, global airlines are competing by lowering air cargo rates.

Korean Air's risk factor is exchange rate fluctuations. As of the end of the second quarter, Korean Air holds 4.9 trillion KRW in net foreign currency debt, and Asiana Airlines, which Korean Air plans to acquire, holds 4.5 trillion KRW in net foreign currency debt. If the Korean won depreciates by 10%, a combined foreign exchange loss of 940 billion KRW will occur, reducing the net asset value per share by 193.3 billion KRW. KB Securities currently forecasts the KRW-USD exchange rate at 1,410 KRW at the end of 2022 and 1,280 KRW at the end of 2023.

KB Securities also set a target price for Jeju Air at 12,000 KRW, 20% lower than before, maintaining a 'Hold' investment rating.

They judged that the passenger market recovery is not as strong as expected, increasing the 2022 operating loss forecast by 9.2 billion KRW and lowering the 2023 operating profit forecast by 31.1%. The target price was also lowered due to a 1.15 percentage point increase in the WACC estimate reflecting rising interest rates.

The reason for maintaining the 'Hold' rating on Jeju Air is due to dilution of per-share value from an increase in issued shares and a slower-than-expected recovery in travel demand. After a paid-in capital increase in the fourth quarter of this year, the number of Jeju Air's tradable shares will increase 2.9 times compared to the COVID-19 period. Earnings per share (EPS), which was 2,936 KRW in 2017, is expected to be only 659 KRW in 2023. KB Securities researcher Lee Hye-in stated, "Due to high inflation, high exchange rates, and high oil prices increasing travel costs, and growing concerns about economic slowdown, it will take more time than previously expected for travel demand to recover to pre-2019 levels."