[Click eStock] KT&G's 1Q Performance 'Holds Up' Amid COVID-19 Stimulated Tobacco Demand

Despite COVID-19, Tobacco Demand Increases Contrary to Expectations
1Q Sales and Operating Profit Both Show Slight Growth

[Asia Economy Reporter Minwoo Lee] Although it was predicted that the spread of the novel coronavirus infection (COVID-19) and the resulting atmosphere of refraining from outdoor activities would reduce cigarette consumption, the opposite was true. As cigarette demand increased, KT&G's first-quarter performance slightly improved.

On the 13th, Cape Investment & Securities forecast that KT&G would achieve consolidated sales of 1.2324 trillion KRW and operating profit of 350.7 billion KRW in the first quarter of this year. This represents a 4.0% increase in sales and a 0.7% increase in operating profit compared to the same period last year. Despite concerns about economic slowdown, this is considered a relatively good performance. Researcher Hyemi Kim of Cape Investment & Securities explained, "Since the domestic cigarette shipment index grew by 10.2% and 8.7% in January and February respectively compared to the same period last year, the total cigarette sales volume performed better than expected. However, due to the inevitable decline in duty-free sales, the overall average price per cigarette is expected to decrease."

The affiliate KGC's first-quarter sales are also expected to rise slightly, estimated at 411.7 billion KRW, a 3.2% increase from the same period last year. However, operating profit during the same period is expected to decrease by 2.3% to 89.1 billion KRW. Researcher Kim stated, "With the surge in demand for health-related products due to COVID-19, and considering that KGC's flagship product, Red Ginseng, holds the highest market share among all products, sales are expected to increase. However, profitability is forecasted to decline slightly due to poor duty-free store sales, which account for 20% of sales."

While cigarette demand remains stable, cigarette exports to the Middle East region have resumed since last month. From the second half of the year, sales from export contracts for the heated tobacco product 'Lil', made in partnership with Philip Morris International (PMI), are also expected to appear. Accordingly, Cape Investment & Securities maintained a 'Buy' investment rating on KT&G and kept the target stock price at 130,000 KRW. The closing price on the previous trading day was 78,200 KRW.

Researcher Kim said, "The current stock price is below a price-to-earnings ratio (PER) of 10 times, and considering the solid domestic performance and future overseas expansion, it is judged to be a buying opportunity. If the noise related to accounting violations is resolved, the stock price rise will become more substantial." Previously, KT&G was warned of severe disciplinary action by financial authorities for intentional accounting violations during the acquisition of Indonesian tobacco company Trisakti in 2011. It is reported that KT&G's audit measures are currently being discussed by the Audit Committee, an accounting expert organization under the Financial Services Commission.

This content was produced with the assistance of AI translation services.