Kiwoom and IBK lower Shinsegae targets despite Q3 profit growth

Price targets for Shinsegae were cut by 14.5% at Kiwoom and 47.4% at IBK despite a 64.6% rise in third-quarter consolidated operating profit. The brokers retained Buy ratings but lowered the valuations behind them.

In its Nov. 11 review, Kiwoom Securities reduced its target to 470,000 won from 550,000 won. IBK Investment & Securities cut its target to 410,000 won from 780,000 won. The reductions amount to 80,000 won per share at Kiwoom and 370,000 won at IBK.

Why did the targets fall?

Falling Korean share prices could weigh on department store spending by reducing consumers’ financial wealth, according to Kiwoom’s analysts. They lowered their forecast for fourth-quarter department store same-store sales growth to 5% from 8.5%.

Kiwoom still expects sales at existing stores to grow 5% year on year in the fourth quarter. Its revision cuts the expected growth rate by 3.5 percentage points.

Alongside the sales revision, the brokerage increased the discount applied to its target price-to-earnings multiple by 10 percentage points. That change reduces the multiple it is willing to assign to earnings when calculating its target.

Lower market valuation multiples were IBK’s stated reason for its target cut. Its analysts also expect fourth-quarter department store industry growth to slow. IBK retained its Buy rating.

Did third-quarter earnings meet expectations?

The company reported consolidated operating profit of 164.3 billion won, up 64.6% from a year earlier, in its Nov. 10 results release. The brokers differed in how they described that result relative to expectations.

Although Kiwoom characterised the quarter as in line with market expectations, IBK said earnings met its own forecast but fell below market consensus. IBK put consensus operating profit at 170.6 billion won, leaving the reported result about 3.7% lower.

How do the targets compare with the share price?

Relative to Shinsegae’s Nov. 10 closing price of 245,500 won, the revised targets imply upside of 91.4% for Kiwoom and 67.0% for IBK. These are comparisons with the previous session’s close, rather than with the share price at the time of this article.

What changed in shareholder returns and store sales?

Shinsegae declared a third-quarter dividend of 2,600 won per share, up from 1,300 won in the previous quarter, according to Kiwoom’s review. The company also plans to cancel treasury shares representing approximately 3.6% of its total issued shares.

Foreign shoppers contributed to the reported sales growth. In its results release, Shinsegae put cumulative foreign-customer sales through the third quarter at 850 billion won, more than double the year-earlier amount. That figure covers the first nine months, rather than the third quarter alone.

Third-quarter sales rose 44% at Shinsegae’s main store, 17% at Gangnam and 14% at Centum City, the company reported.