[Click eStock] KT&G, Comfortable Buying at PER Below 10 Times

[Asia Economy Reporter Lee Seon-ae] DB Financial Investment announced on the 5th that it maintains a buy rating and a target price of 110,000 KRW for KT&G. This is because the estimated fluctuations are not significant when the effect of foreign exchange translation gains is excluded.

Jaeheon Cha, a researcher at DB Financial Investment, stated, "Although the outperformance margin compared to the KOSPI index has slightly narrowed due to the recent rebound of growth stocks in the stock market, the negative factors that burdened earnings are gradually weakening, leading to expectations of earnings recovery. Considering a return on equity (ROE) of around 12%, a dividend yield of about 5%, and the potential for future earnings recovery, we recommend a comfortable purchase if the price-to-earnings ratio (PER) is below 10."

KT&G's consolidated sales in the second quarter grew by 10.9% to 1.4175 trillion KRW, driven by global cigarette sales growth in Indonesia and Latin America, recovery in domestic cigarette demand, and market share increases in electronic cigarettes (47%) and combustible cigarettes (65.4%). Sales of KGC (ginseng) were sluggish due to the lockdown in China, and real estate sales decreased due to the effect of one-time contributions. Operating profit increased by only 1% to 327.6 billion KRW due to mix adjustments, decreased real estate sales, and reduced KGC profits. Net income attributable to controlling shareholders rose by 33.1% to 330.8 billion KRW, boosted by foreign exchange translation gains on a standalone basis due to the rising exchange rate.

Excluding foreign exchange translation gains, the performance generally met both our estimates and consensus. Despite the adverse impact of COVID-19 on the ginseng segment, the removal of U.S. subsidiary sales, and the one-time effect in real estate, KT&G once again demonstrated strong earnings resilience, which is viewed positively overall.

Researcher Cha added, "Considering the increase in domestic market share, expansion of overseas electronic cigarette export countries, high growth of overseas subsidiaries, and the bottoming out of KGC's performance, we expect the strength of the company's earnings improvement to gradually increase in the second half of the year."

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