Kolon Industries (120110)

Transcription

1 KOREA November 25, 2011 Company Analysis Kolon Industries (120110) BUY (maintain) Undervalued Even in Worst-case Scenario Dongkun Kim Analyst / Hybrid Chemicals dongkun.kim@hdsrc.com Daeyong Park Analyst / Hybrid Chemicals dy.park@hdsrc.com Current price (Nov 24) KRW60,800 Fair value KRW90,000 (prev. KRW119,000) Reuters code Bloomberg code Industry/Sector Rating KS KS Chemicals Overweight Market cap USD1.3bn Ordinary shares issued 24,717,241shrs Free float 53.9% KOSPI KOSDAQ Avg T/O Vol (60d) shrs Avg T/O Val (60d) USD34.6mn Foreign ownership 15.1% 3yr CAGR of adj EPS (11~13) 10.0% Market s 3yr CAGR of adj. EPS 10.3% 52wk high/low KRW129,000 / KRW55,200 Beta (12M, daily return) 1.0 Major shareholders KOLON CORPORATION etc. 30.8% Price performance 1M 3M 6M Absolute -16.5% -44.0% -33.2% Relative -11.7% -45.2% -23.3% Relative performance (LHS) % Stock price (RHS) KRW /10 1/11 3/11 5/11 7/11 9/11 150, , ,000 90,000 70,000 50,000 3Q11 OP (KRW93.6bn) fell slightly short of estimates primarily due to earnings removal following sale of stake in Kolon B&S and earnings slowdown at consolidated subsidiaries 4Q11 profits to grow QoQ led by continuously robust flagship businesses, including fashion (a peak demand season), industrial materials and chemicals Profit uptrend to continue through 2012 fueled by brisk sales of flagship products with solid global market shares and benefits from capacity expansion Kolon Industries s shares are undervalued even under worst-case scenario, as in paying full compensation (KRW1tr) to US-based DuPont for loss of intellectual property case BUY maintained, but fair value trimmed to KRW90,000 reflecting risks stemming from the result of first trial against DuPont 3Q11 OP of KRW93.6bn fell just short of estimates 3Q11 consolidated OP came in at KRW93.6bn, down 21.4%QoQ and 13.5%YoY. Although stand-alone OP of KRW74.7bn was in line with our estimates, consolidated OP was weaker than expected. This can be attributed to earnings removal after Kolon Industries sold its stake in its sub-subsidiary Kolon B&S in Sep and unexpectedly large earnings declines at consolidated subsidiaries (e.g., weaker margins at KIN, the company s film manufacturing subsidiary in Indonesia). FY-end 12/09A 12/10A 12/11F 12/12F 12/13F OR (KRWbn) NA 3, , , ,285.4 OP (KRWbn) NA NP (KRWbn) NA Parent NP (KRWbn) NA EPS (KRW) NA 10,136 13,686 12,303 14,621 Adj. EPS (KRW) NA 10,136 10,800 11,360 13,500 PER* (x) NA PBR (x) NA EV/EBITDA (x) NA Div. Yield (%) NA ROE (%) NA ROIC (%) NA For explanations of equity research ratings and disclosures, please refer to the compliance section at the end of this report.

2 Profits to resume growth in 4Q11 OP uptrend to continue in 2012 Current share price excessively low even with DuPont s compensation at KRW1tr Fair value cut to KRW90,000 in view of full payment of compensation OP is forecast to climb to KRW121.2bn in 4Q11, renewing the quarterly high record for OP from 2Q11. The fashion division, which is currently enjoying peak seasonal demand, will likely lead the company s overall earnings growth. The industrial materials and chemicals divisions also should see 4Q11 OP pick up QoQ fueled by robust sales and solid spreads for flagship products (e.g., tire cord/airbag, petroleum resins). The film division s 4Q11 OP is projected to inch down QoQ due to the still sluggish LCD and PV industries. In 2012, Kolon Industries is expected to sustain its top- and bottom-line expansion on brisk sales of flagship products based on its firm grip over the global market and capacity additions for airbags, PET films, and tire cords in With the outdoor wear market set to keep growing robustly in 2012, the fashion division s 2012 OP is projected to rise more than 15%YoY. Kolon Industries announced the first trial outcome of its ongoing litigation with DuPont over the alleged infringement of aramid-related trade secrets. The size of total compensation is to reach KRW1.05tr (jury verdict of USD920mn, plus punitive damages of USD350,000). A final ruling will be sentenced after appeal, which will likely take at least one year. Details relating to the provisions for the lost trial and deposits for Kolon Industries s appeal are not yet released. However, even under the worst-case scenario, in which the company pays the full compensation decided at the first trial, the company s fair enterprise value is estimated at KRW2.3tr. The company valuation was calculated by taking the sum (KRW4.7tr) of the operating value and investment asset value less net debt of KRW2.4tr. The current share price, which has a market cap of just KRW1.5tr, hints at undervaluation. In view of the compensation amount from the first trial, we lower our adjusted 2012 EPS estimate to KRW11,360 from KRW13,288 and reduce our fair value to KRW90,000 from KRW119,000. The fair value was derived conservatively, assuming that the first ruling s compensation amount will be fully paid, but still holds 48% upside potential from the current share price. Thus, we keep a BUY rating on the company. HYUNDAI Research 2

3 Fig 1: Earnings growth to resume in 4Q11 (KRWbn) 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11P 4Q11F F 2012F OR 1, , , , , , , , , , ,389.7 Industrial materials , , ,836.6 Films/electronic materials Chemicals , ,163.0 Fashion , , ,453.8 Fashion materials/others OP Industrial materials Films/electronic materials Chemicals Fashion Fashion materials/others Non-operating profits (15.4) (19.6) (17.4) (24.9) (7.4) (8.2) (19.3) (9.8) (77.6) (44.7) (98.2) Interest income (24.8) (26.6) (24.6) (23.8) (15.3) (17.1) (24.1) (16.3) (99.9) (72.8) (129.3) Equity-method income (1.1) Others (0.0) 0.0 (0.1) 0.0 (0.2) 0.0 EBT NP Parent NP EPS (KRW) 10,136 13,686 12,303 Adj. EPS (KRW) 10,136 10,800 11,360 Note: Actual results for 1Q10 through 3Q11 exclude figures related to Kolon B&S Fig 2: Adjusted EPS estimate revised down assuming compensation payment Additional interest Previous adj. EPS Revised adj. EPS after %Change expense (funding cost (KRW) compensation payment (KRW) (KRWbn) assumed at 6%) 11F 12F 13F 11F 12F 13F 11F 12F 13F Assumed total compensation ,968 12,881 14,886 (3.4) (3.1) (2.0) ,385 13,288 15,195 11,344 12,271 14,422 (8.4) (7.7) (5.1) 1, ,800 11,360 13,500 (12.8) (14.5) (11.2) HYUNDAI Research 3

4 Fig 3: Fair value cut to KRW90,000 (KRWbn) 2012F EBITDA Industrial materials Films Chemicals Fashion Fashion materials 46.6 EV/EBITDA (x) 6.4 Industrial materials 6.3 Films 6.3 Chemicals 6.3 Fashion 6.3 Fashion materials 6.3 Operating value (A) 4,365.9 Industrial materials 1,450.7 Films 1,092.8 Chemicals Fashion Fashion materials Equity-method subsidiaries (B) Stake (%) SKC Kolon PI Book value as of end-2q11 Hana Capital, etc Book value as of end-2q11 Available-for-sale securities (C) CAPRO Market value Korea Express 2.3 Market value Debt securities 15.0 Book value as of end-2q11 Investment assets (D=B+C) Enterprise value (E=A+D) 4,752.3 Net debt (F) Cash flow upon the exercise of BWs reflected When KRW200bn is set aside as provision 1,548.5 When KRW500bn is set aside as provision 1,848.5 When KRW1.05tr is set aside as provision 2,397.2 Fair market cap (G=E-F) When KRW200bn is paid in compensation 3,203.8 When KRW500bn is paid in compensation 2,903.8 When KRW1.05tr is paid in compensation 2,355.1 Market cap of preferred shares (H) 46.1 Market cap of common shares (I=G-H) When KRW200bn is paid in compensation 3,157.7 When KRW500bn is paid in compensation 2,857.7 When KRW1.05tr is paid in compensation 2,309.0 No. of common shares issued based on BW exercises (J=a+b+c-d) 25,744,205 No. of common shares issued (a) 24,717,241 No. of shares upon the exercise of BWs issued in 1999 (b) 1,282,500 No. of shares upon the exercise of BWs issued in 2009 (c) 338,675 No. of treasury shares (d) 594,211 Fair value (KRW, I/J) When KRW200bn is paid in compensation 122,657 When KRW500bn is paid in compensation 111,003 When KRW1.05tr is paid in compensation 89,690 HYUNDAI Research 4

5 Profit & Loss Operating revenue NA 3, , , ,285.4 Cost of sales NA 2, , , ,457.8 Gross profit NA , , ,827.6 SG&A expenses NA , ,215.6 Other operating income NA Operating profit NA EBITDA NA Non-operating accounts NA (22.5) (47.7) (98.2) (92.9) Net financing income NA (81.1) (75.9) (129.3) (118.1) Profit on equity method NA Net other non-operating income NA (14.2) (0.1) 0.0 (9.1) Profit before tax NA Income tax expense NA Net profit NA Profit attributable to owners of parent NA Total comprehensive income NA TCI, attributable to owners of parent NA Net exceptionals NA Adj. net profit NA Cash Flow Net profit NA Depreciation & amortization NA Other non-cash adjustments NA (26.9) Investments in working capital NA (167.5) (360.9) (239.2) (193.0) Other operating cash flow NA 0.0 (134.5) (87.5) (103.8) Cash flow from operating activities NA Capital expenditure NA (155.0) (250.0) (200.0) (200.0) Investments in intangibles NA (16.7) Changes in current financial assets NA (129.3) Changes in investment assets NA (21.0) Other investment cash flow NA 0.4 (2.8) (100.0) (200.0) Cash flow from investing activities NA (321.6) (252.8) (300.0) (400.0) Proceeds from (repayments of) debt NA (125.7) Changes in equity NA Dividends paid NA 0.0 (32.0) (39.1) (45.9) Other financing cash flow NA 1.5 1,268.2 (72.6) 5.5 Cash flow from financing activities NA ,236.2 (111.7) (40.4) Other cash flow NA Increase/decrease in cash NA ,113.2 (99.4) (31.1) Cash and cash equivalents at FYB NA , ,174.0 Cash and cash equivalents at FYE NA , , ,142.9 Gross operating cash flow NA Free cash flow NA (10.9) 31.3 Net cash flow NA (909.3) (638.9) (85.6) (31.1) Net cash (net debt) NA (871.8) (1,405.2) (1,490.8) (1,522.0) Statement of financial position Cash and cash equivalents NA , , ,142.9 Current financial assets NA Trade receivables NA ,045.4 Inventories NA Other current assets NA Current assets NA 1, , , ,295.5 Investment assets NA Property, plant and equipment NA 1, , , ,025.5 Intangible assets NA Deferred tax assets NA Other non-current assets NA Non-current assets NA 2, , , ,019.1 Total assets NA 3, , , ,314.6 Trade payables NA Short-term financial liabilities NA , , ,001.2 Current provisions NA Other current liabilities NA Current liabilities NA 1, , , ,973.0 Non-current financial liabilities NA , , ,742.4 Non-current provisions NA Provisions for employee benefits NA Deferred tax liabilities NA Other non-current liabilities NA (13.5) Non-current liabilities NA , , ,995.3 Total liabilities NA 1, , , ,968.3 Issued capital NA Share premium NA Other equity interest NA (0.2) (0.2) (0.2) (0.2) Accumulated other comprehensive income NA Retained earnings NA ,180.8 Equity attributable to owners of parent NA 1, , , ,293.7 Non-controlling Interests NA Total equity NA 1, , , ,346.3 Total Liab. and equity NA 3, , , ,314.6 Per-share Performance (KRW) 12/09A 12/10A 12/11F 12/12F 12/13F EPS NA 10,136 13,686 12,303 14,621 Adj. EPS NA 10,136 10,800 11,360 13,500 BPS NA 50,505 61,586 72,403 85,283 SPS NA 151, , , ,883 GCFPS NA 20,151 16,359 21,502 23,212 DPS NA 1,200 1,450 1,700 2,000 3yr CAGR of adj. EPS NA NA Operating Statistics & Ratios (%) 12/09A 12/10A 12/11F 12/12F 12/13F OR growth NA NA NA OP growth NA NA NA EBITDA growth NA NA NA NP growth of parent NA NA 72.4 (9.3) 18.8 Adj. NP growth NA NA OP margin NA EBITDA margin NA NP margin NA Adj. NP margin NA Note: Adj. EPS = [(Adjusted NP - preferred share dividends) + (after-tax dilution adjustment)] / (diluted avg. number of total ordinary shares outstanding) Adjusted NP = (Parent NP) - [discontinued operation gains + (net exceptional gains) (1 - marginal tax rate)] Net exceptional gains: Pre-tax exceptional gains (exceptional gains attributable to parent including FX gains, derivatives gains, valuation gains, and one-off gains) Shareholder Value & Financial Structure (%) 12/09A 12/10A 12/11F 12/12F 12/13F ROE NA ROA NA ROIC NA WACC NA ROIC/WACC (x) NA Economic profit (KRWbn) NA Total liab./equity NA Net debt/equity NA Interest coverage (x) NA The author has visited Kolon Industries s subsidiary in Indonesia, with the company paying the expenses. Hyundai Securities has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. The author(s) confirms that the material contained herein correctly represents his/her/their opinion and that it has been prepared without any undue influences or interventions. Hyundai Securities Co., Ltd. or any of its affiliates has not taken part in public offerings of the company(ies) covered in this report for the past 12 months. The author(s) of this report does not have any interest in the company(ies) covered herein. Rating: Sector: Overweight (+10% or more), Neutral ( %), Underweight (-10% or more) Company: Strong BUY (+30% or more), BUY ( %), Marketperform ( %), Underperform (-10% or more) Strong BUY = 4, BUY = 3, Marketperform = 2, Underperform = 1, Blackout/Universe Exclusion = 0 (Share price, Fair value, Rating ) All Hyundai Securities Research is available via the following electronic databases: Bloomberg, Thomson Reuters, FactSet. Contact your Hyundai Securities sales representative for access. This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, we do not guarantee that the information and data are accurate or complete, and, therefore, this report is subject to change without prior notice. Individual investment should be made based on each client s own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of Hyundai Securities Co. and, thus, it may not be reproduced, distributed, or modified without the prior consent of Hyundai Securities Co. This report is not prepared for academic purposes, and any third party wishing to quote from it for academic publications should receive the prior consent of Hyundai Securities Co. KRW Kolon Industries 160, , , ,000 80,000 60,000 40,000 20,000 10/2 11/2 Rating