[Click eStock] "Inka Financial Services, 2Q Earnings Shock Is Growing Pain... Target Price Down"

Shinhan Investment Corp. maintained a 'Buy' rating on Inka Financial Services on the 16th, stating that the 'earnings shock' is merely growing pains and that any further adjustments should be actively used as buying opportunities. However, considering the downward revision of profit estimates, the target price was lowered from 23,000 KRW to 18,000 KRW.

Lim Heeyeon, Senior Researcher at Shinhan Investment Corp., said, "We lowered the target price by 21.7% considering the downward revision of profit estimates," adding, "Since the stock price has already fallen by the amount corresponding to the downward revision of earnings per share (EPS), further price declines seem unnecessary."

Inka Financial Services recorded an operating profit of 8.6 billion KRW and a net profit attributable to controlling shareholders of 5.2 billion KRW in the second quarter of this year. Operating profit increased by 11.1% year-on-year, but net profit attributable to controlling shareholders decreased by 18.4%. Senior Researcher Lim analyzed, "The performance was significantly below our estimate (net profit of 8.3 billion KRW). Sales fell short of estimates by about 2 billion KRW due to a higher proportion of short-term payment whole life insurance, which has a relatively low earned premium recognition rate. Additionally, the cost ratio rose by 3.5 percentage points from the previous quarter to 82.7% due to increased additional commissions for short-term payment whole life insurance and new agent settlement support payments."

He expressed the view that the current cost increase should be approached positively. Researcher Lim explained, "As competition for recruiting agents intensifies recently, the industry is providing large-scale settlement support payments. When settlement support payments are provided, the commission payment rate to agents decreases, so mid- to long-term cost ratio improvements can be expected."

Following the disclosure of the semi-annual report, the stock price plunged 20% due to disappointment over the poor performance. Senior Researcher Lim stated, "Considering that agent recruiting effectively expands production capacity (capacity), this is merely a pre-expense before strengthening sales capabilities and not a factor damaging fundamentals," adding, "Since the main cause of this earnings shock is ultimately capacity expansion, it is just severe growing pains, and any further adjustments should be actively used as buying opportunities."