[Click eStock] LG Innotek, Fundamentals Priced In Early 'Historic PBR Bottom'

Hi Investment & Securities announced on the 5th that it maintains a buy rating and a target price of 330,000 KRW for LG Innotek. This decision is based on the judgment that concerns about weak iPhone demand and deteriorating fundamentals have been largely priced in. Currently, LG Innotek's stock is trading at a 2024 price-to-earnings ratio (PER) of 8.3 times and a price-to-book ratio (PBR) of 1.04 times, which are below the 10-year average PER of 11 times and PBR of 1.3 times. Historically, a PBR of 1.0 times has been a solid support level for the stock price. This was also the case during the LED business slump in 2011 and the iPhone boycott movement in China amid the intensified US-China trade dispute in 2019.

Go Eoyoung, a researcher at Hi Investment & Securities, stated, "Although it is judged that sustainable profitability has declined due to the burden of raw material and fixed costs, if the stock price falls below a PBR of 1.0 times due to macroeconomic instability, it is considered an undershooting area outside of fundamentals." He added, "In the short term, expectations for front-end demand have significantly decreased, but in the mid to long term, attention should be paid to the company's cost reduction efforts and the direction of expanding applications."

However, the burden of fixed costs due to production disruptions is expected to increase. The third-quarter earnings are estimated at sales of 4.7 trillion KRW (-12.6%) and operating profit of 149.8 billion KRW (-66.3%). While the sales estimate remains unchanged from previous projections, operating profit has been revised downward by 32%. Profitability by segment is estimated at 3.0% for optical solutions, 7.4% for substrate materials, 0.4% for automotive components, and 7.1% for electronic components. Profitability is expected to be weaker than anticipated mainly in optical solutions and substrate materials. In optical solutions, production disruptions occurred in components such as prisms and lenses within the Folded Zoom module, along with some issues in module assembly. In a situation where fixed costs have increased, such production disruptions result in reduced profitability. Researcher Go noted, "However, it is understood that the related issues normalized starting in September."

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