[Click eStock] "Emart, Increase in Financial Costs and Slowing Growth... Target Price Down"

On the 22nd, IBK Investment & Securities maintained a 'Neutral' investment rating on Emart but lowered the target price from the previous 98,000 KRW to 80,000 KRW.

Emart's first-quarter earnings fell significantly short not only of market expectations but also of IBK Investment & Securities' own forecasts. Despite IBK's estimates being the lowest among securities firms, the results underperformed by approximately 74.7%, recording weak earnings.

More concerning than the poor earnings is the rapid increase in financial costs. Interest income and expenses in the first quarter amounted to about -74.8 billion KRW, an increase of 20.6 billion KRW compared to the same period last year. Emart's borrowings also increased by 350 billion KRW, leading to a swift rise in interest expenses. Although Emart has been repaying debt through asset sales, this year it is minimizing capex and pursuing a profitability-focused strategy to improve cash flow. However, fundamental improvements are delayed, making the situation challenging.

[Image source=Yonhap News]

The sharp slowdown in external growth rates is another growing concern. While this is partly due to temporary strategic factors, it is also interpreted as a result of structural front-end industry slowdown and choices made to improve profitability. Although profitability may temporarily improve, the lack of clear momentum for external growth is worrisome.

The earnings of companies that recently attempted mergers and acquisitions (M&A) show a similar pattern. They sought to build value chains and expand market share through aggressive investments, but performance remains weak to date. In particular, Starbucks Korea (SCK) has seen fixed costs rise due to aggressive store network expansion, and its high dependence on global raw material sourcing makes it vulnerable to exchange rate fluctuations, which is regrettable.

Nam Seong-hyun, a researcher at IBK Investment & Securities, advised, “It is recommended to take a conservative approach to Emart’s second-quarter earnings as well,” adding, “The second quarter is a period with a relatively high proportion of fixed costs. Although the operating environment is more favorable than in the first quarter, achieving a turnaround in performance will not be easy.”