SUMMARY FINANCIAL DATA

Transcription

1 Company Initiation (28513) Vaccines set to go global We reinstate coverage of at BUY with a KRW1, target. The company will likely benefit from its recent co-polyester plant capacity additions and subsequent utilization hikes, with it also poised to gain earnings momentum from: 1) the release of new products by its life science business; 2) royalty income for CSL s hemophilia A treatment Afstyla; and 3) development milestones from Sanofi which should start Phase I clinical trials overseas for diplococcus pneumoniae vaccine in 1H19. Keunhee Seo, Ph.D. Analyst keunhee.seo@samsung.com Wonyong Park, CFA Analyst wkrw.park@samsung.com AT A GLANCE Target price KRW1, (38.9%) Current price KRW72, Market cap KRW833.75b/USD736.92m Shares (float) 11,579,852 (63.5%) 52-week high/low Avg daily trading value (6-day) KRW122,/KRW72, KRW3.9b/ USD3.5m ONE-YEAR PERFORMANCE 1M 6M 12M (%) Vs Kospi (%pts) SAMSUNG vs THE STREET No of estimates 2 Target price 13, Recommendation 4. BUY : 5 / BUY: 4 / HOLD: 3 / SELL: 2 / SELL : 1 WHAT S THE STORY? Near-term earnings stagnant, but long-term growth drivers in place: We reinstate coverage of (SKC) at BUY with a 12-month target price of KRW1,, on expectations of its: 1) green chemicals division enjoying operating leverage amid growing demand for co-polyester; and 2) life science division posting steady growth with it set to debut several vaccines. The firm has an estimated enterprise value of KRW1.16t, which is based on a DCF valuation given the prospects of all-round growth and steady rises in free cash flows. Increased costs from strong oil prices could hit its near-term valuation, along with steady losses by consolidated subsidiary Initz, but SKC s enterprise value ought to rise grow steadily amid expansion of the vaccine business. Green chemicals division to boost sales and cut costs: The green chemical division of SKC added co-polyester production capacity of 6, tonnes last year to its 12, tonnes of polyester production capacity, with both plants fully up and running amid strong demand, so more capacity expansions are planned. The division should enjoy sales growth since Korea raised its mandatory biodiesel blend ratio from 2.5% in 217 to 3% this year, but earnings growth might be limited as strong oil prices subsequently lift those for raw materials PTA and MEG. We expect the division s full-year sales and operating profit to rise a respective 15.2% and 11.2% to KRW1t and KRW51.6b. Life science division poised for full-fledged growth: SKC s life science division and vaccine business benefit from stable influenza vaccine sales, market-share gains from proprietary herpes zoster vaccine SKYzoster, royalty income for CSL s hemophilia A treatment Afstyla, and out-licensing deals with Sanofi Pasteur. Its sales and operating profit will likely climb 14.8% and 169.9% to KRW368.7b and KRW28.3b this year. SUMMARY FINANCIAL DATA (Continued on the next page) E 219E 22E Revenue (KRWb) 88 1,426 1,516 1,582 Net profit (adj) (KRWb) (1) EPS (adj) (KRW) (655) 3,226 4,37 6,886 EPS (adj) growth (% y-y) nm nm EBITDA margin (%) (2.) ROE (%) (1.2) P/E (adj) (x) n/a P/B (x) EV/EBITDA (x) n/a Dividend yield (%).... Source: Company data, Samsung Securities estimates

2 Vaccines set to go global: We foresee enjoying influenza vaccine sales growth at home before starting related exports from 22 after winning WHO pre-qualification, with exports of varicella vaccine set to commence next year with it expected to win a Pan American Health Organization bid. SKC should receive royalties of KRW4b this year from out-licensing Afstyla to CSL in addition to KRW16b from an out-licensing contract with Sanofi Pasteur (France). It also expected to recognize development milestones from diplococcus pneumoniae vaccine (out-licensed to Sanofi) as the treatment is scheduled to enter US Phase I clinical trials in 1H19. 91

3 Valuation We reinstate coverage of SKC at BUY with a 12-month target price of KRW1,, which we derived from a discounted cash flow (DCF) valuation to reflect its: 1) increased utilization to fulfil copolyester demand growth; and 2) upcoming release of several vaccines that should bring stable earnings growth at the life science division. Our major assumptions include a risk-free rate of 2% (based on yields on 3-year treasury bonds), market risk premium of 7.57%, a 52-week average beta of.7x, and perpetual growth rate of 1.9% (Korea s projected GDP growth rate in 22). Our initial target price has 34.7% upside at current prices. We use a [supplementary] sum-of-the-parts valuation method that also begets a fair value of KRW1,, which is calculated by subtracting SKC s net debt of KRW776.5b from the sum of its operating value ie, KRW1.363t, comprising the green chemicals division (KRW712.5b, based on the 7x forward EV/EBITDA of major pharmaceuticals players), and the life science division (KRW651.2b, based on the 13.2x average EV/EBITDA of large domestic pharmaceuticals) and non-operating value of KRW485.8b (comprising KRW23.7b from pipeline drugs and KRW166.3b from other invested assets). DCF valuation (KRWb) 218E 219E 22E 221E 222E 223E 224E 225E Green Chemical Division 1,2 1,99 1,131 1,2 1,39 1,61 1,82 1,1 Y-y (%) (9.8) Life Science Division Y-y (%) Others Y-y (%) (64.7) Sales 1,426 1,516 1,582 1,756 1,91 2,45 2,16 2,257 Y-y (%) EBIT Tax rate (%) NOPLAT Depreciation CAPEX Change in working capital FCF (65) (78) (47) WACC (%) 5.7 Permanent growth rate (%) 1.9 Permanent value 2,814 Discount rate (%) Present value of FCF (61) (7) (4) Present value of permanent value 1,81 Total present value 1,937 Net borrowings 777 Fair value 1,16 Adjusted number of outstanding shares ( ) 11,58 Target price, unrounded (KRW) 1,175 Target price (KRW) 1, Current price (KRW) 72, Upsides (%) 38.9 Notes: Cost of equity = 7.4%, based on risk-free rate of 2% (ie, 3-year KTB yield), market risk premium of 7.57%, and 52-week beta of.7 Permanent growth rate = 1.9%, equal to consensus estimate of Korea s GDP growth rate Source: Samsung Securities estimates 92

4 SOTP valuation (KRWb) Forward EBITDA EV/EBITDA Note A. Operating value (B+C) 1,364 B. Green Chemical Division Kospi Chemistry Sector forward EV/EBITDA Kospi Pharmaceuticals Sector forward C. Life Science Division EV/EBITDA D. Non-operating value (E+F+J) 486 E. New drugs 231 Royalties from Afstyla F. Investment equities (G+H+I) 166 Book value G. SK Petrochemical (1%) 29 H. Initz (66%) 69 I. Other 68 J. Real estate investments 89 Book value K. Net borrowings 777 L. Target value (A+D-K) 1,162 M. Adjusted number of outstanding shares ( ) 11,58 N. Per-share fair value (L/M)(KRW) 1,335 O. Target price (KRW) 1, P. Current price (KRW) 72, Q. Upside (%) 38.9 Source Company data, Samsung Securities estimates 93

5 Earnings estimates 218 results being driven by life science division Our forecasts have the 218 sales and operating of SKC up a respective 6% and 125.1% to KRW1.426t and KRW51.3b, with those of its: 1) green chemicals division expected to rise 15.2% and 11.2%, respectively, to KRW1t and KRW51.6b thanks to Korea s mandatory biodiesel blend ratio being raised from 2.5% in 217 to 3% this year, which boosted utilization rates of its new co-polyester plant; and 2) life science division to jump a respective 14.8% and 169.9% to KRW368.7b and KRW28.3b on stable sales of influenza vaccines, the debut of proprietary herpes zoster vaccine SKYzoster, and royalty income hikes for CSL s hemophilia A treatment Afstyla. We expect the parent s sales and operating profit to grow 6.3% and 42.2% to a respective KRW1.515t and KRW73b next year, thanks to: 1) reduced losses by consolidated subsidiary Initz; 2) leverage effects as its green chemicals division increases utilization; and 3) stable earnings growth at its life science division. Sales outlook, by segment (KRW 1 million) 5, 4, 3, 2, 1, 975 1, ,16 1,16 1, , ,57 1,11 1,14 1,38 1,12 1,13 1,56 1,232 1, Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E Life Science Co-polyester Bioenergy Others Source Company data, Samsung Securities estimates Operating profit outlook, by segment (KRW 1 million) (7) (4) (1) (1) (17) (48) (39) (33) (5) (3) (38) (8) (8) (63) (2) (3) (4) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E Life Science Co-polyester Bioenergy Others Source Company data, Samsung Securities estimates 94

6 217 h 219E 3Q 17-2Q18 P/E band P/B band (KRW) (KRW) 16, 14, 12, 1, 8, 6, 35x 3x 25x 2x 15x 16, 14, 12, 1, 8, 6, 2.2x 1.9x 1.6x 1.3x 1.x 4, 4, 2, Jan 18 Apr 18 Jul 18 Oct 18 2, Jan 18 Apr 18 Jul 18 Oct 18 Source: QuantiWise, Samsung Securities Source: QuantiWise, Samsung Securities Ownership structure Choi Chang-won et al. 44.6% SK Discovery 24.8% 28.3% 45.6% SK E&C SK Gas Source: Company data, Samsung Securities : Shareholding structure SK Discovery: Shareholding structure Others 64.3% SK Discovery 24.8% NPS 1.9% Others 48.2% Choi Chang-won et al. 44.6% Source: Company data, Samsung Securities Source: Company data, Samsung Securities NPS 7.2% 95

7 Income statement Year-end Dec 31(KRWb) E 219E 22E Sales n/a 88 1,426 1,516 1,582 Cost of goods sold n/a 75 1,133 1,21 1,25 Gross profit n/a Gross margin (%) n/a SG&A expenses n/a Operating profit n/a (9) Operating margin (%) n/a (1.5) Non-operating gains (losses) n/a (3) (28) (23) (2) Financial profit Financial costs Equity-method gains (losses) () Other n/a (1) (6) (5) (5) Pre-tax profit n/a (13) Taxes n/a (3) (3) 1 16 Effective tax rate (%) n/a 21.5 (14.) Profit from continuing operations (1) Profit from discontinued operations Net profit n/a (1) Net margin (%) n/a (11.3) Net profit (controlling interests) n/a (9) Net profit (non-controlling interests) n/a (1) (15) (16) (26) EBITDA n/a (2) EBITDA margin (%) n/a (2.) EPS (parent-based) (KRW) n/a (655) 3,226 4,37 6,886 EPS (consolidated) (KRW) n/a (758) 2,47 3,76 4,919 Adjusted EPS (KRW)* n/a (655) 3,226 4,37 6,886 Balance sheet Year-end Dec 31(KRWb) E 219E 22E Current assets n/a Cash & equivalents n/a Accounts receivable n/a Inventories n/a Other current assets n/a Fixed assets n/a 1,25 1,253 1,246 1,249 Investment assets n/a Tangible assets n/a 1,98 1,11 1,97 1,13 Intangible assets n/a Other long-term assets n/a Total assets n/a 1,912 2,19 2,157 2,233 Current liabilities n/a Accounts payable n/a Short-term debt n/a Other current liabilities n/a Long-term liabilities n/a Bonds & long-term debt Other long-term liabilities n/a Total liabilities n/a 1,181 1,35 1,359 1,37 Owners of parent equity n/a Capital stock n/a Capital surplus n/a Retained earnings n/a (9) Other n/a (27) (33) (33) (33) Non-controlling interests equity n/a (14) Total equity n/a Net debt n/a Cash flow statement Year-end Dec 31(KRWb) E 219E 22E Cash flow from operations (11) Net profit (1) Non-cash profit and expenses Depreciation Amortization Other Changes in A/L from operating activities (1) (57) (9) (12) Cash flow from investments (9) (86) (73) (76) Change in tangible assets (8) (79) (72) (75) Change in financial assets (15) 4 () (1) Other 15 (1) (1) (1) Cash flow from financing Change in debt Change in equity 733 (3) Dividends n/a Other n/a (1,614) (12) Change in cash (11) Cash at beginning of year Cash at end of year Gross cash flow Free cash flow (19) (28) Note: * Excluding one off items ** Fully diluted, excluding one-off items *** From companies subject to equity-method valuation Source: Company data, Samsung Securities estimates Financial ratios Year-end Dec E 219E 22E Growth (%) Sales nm nm 1, Operating profit nm nm nm Net profit nm nm nm Adjusted EPS** nm nm nm Per-share data (KRW) EPS (parent-based) n/a (655) 3,226 4,37 6,886 EPS (consolidated) n/a (758) 2,47 3,76 4,919 Adjusted EPS** n/a (655) 3,226 4,37 6,886 BVPS n/a 53,425 56,53 6,364 67,257 DPS (common) Valuations (x) P/E*** n/a n/a P/B*** n/a EV/EBITDA n/a n/a Ratios (%) ROE n/a (1.2) ROA n/a (.5) ROIC n/a (.5) Payout ratio n/a.... Dividend yield (common)..... Net debt to equity n/a Interest coverage (x) n/a (4.)