[Click eStock] KT&G, Buy Strategy Considering Dividend Yield Effective

Hi Investment & Securities announced on the 12th that it maintains a buy rating and a target price of 110,000 KRW for KT&G.

Researcher Lee Kyung-shin of Hi Investment & Securities stated, "Although there is some disappointment as the rise in the cost of cigarettes and the reduction in real estate income lower expectations for 2023, the likelihood of these concerns persisting in the mid-to-long term is limited. Rather, a positive interpretation is possible in that the business portfolio's focus is shifting faster than expected toward the three core growth businesses: NGP, overseas tobacco, and health & functional foods." He added, "Considering the structural business responses to global demand changes by segment and the relative stability against worsening external variables, a buying strategy based on the current stock price level, valuation, and dividend yield is deemed valid."

On a consolidated basis for Q1, sales and operating profit recorded 1.3957 trillion KRW (-0.5%) and 316.6 billion KRW (-4.9%), respectively. Despite reduced contributions from real estate performance and rising costs, the company delivered operating results in line with market expectations, supported by growth in overseas tobacco driven by exchange rate effects and volume expansion, improved market dominance in domestic and overseas NGP markets, and strong exports of health & functional foods.

Domestically, steady growth in volume and market share for both conventional cigarettes and NGP continues. Although total domestic demand for conventional cigarettes and KT&G’s sales volume slightly decreased compared to the same period last year, market share was maintained at 65.7% due to strong dominance relative to the market decline. NGP also sustained its previous high growth trend. The partial recovery in duty-free volume is believed to have positively impacted net sales prices.

Despite top-line growth, margin levels were somewhat disappointing due to rising raw material costs, including imported tobacco leaves. Given recent conditions, it is necessary to keep in mind the sustainability of this short-term trend. However, considering the potential for volume increases and ASP improvements through further expansion of travel demand, these burdens are expected to be offset. Improvements in overseas conventional cigarette operating results were driven by exchange rate appreciation, balanced growth in key overseas regions, and volume expansion from strengthened direct operations of overseas subsidiaries in Indonesia, CIS, and other markets.

Regarding global NGP, a positive interpretation is possible as the net increase in device export volumes to expand the market base led to a 64.3% growth in volume within the local stick market. Considering the new contract with PMI, profit contribution is also estimated to have expanded compared to before. KGC saw an increase in profit contribution despite adjustments related to holiday sales performance pre-reflected in Q4 last year, thanks to improvements in the duty-free segment and export growth. Researcher Lee noted, "While it is somewhat burdensome to assume a rapid demand expansion in the short term given external variables, the annual operating performance trend should be weighted toward improvement compared to the previous year. Considering the increasing global interest in immunity and health-related matters, which is likely to sustain demand beyond short-term issues, mid-to-long-term growth remains valid."