(518 KS) Operating profit to improve in 2H Food & Beverage Results Comment August 16, 213 (Maintain) Trading Buy Target Price (12M, W) 115, Share Price (8/14/13, W) 12, Expected Return 13% OP (13F, Wbn) 63 Consensus OP (13F, Wbn) 65 EPS Growth (13F, %) -.7 Market EPS Growth (13F, %) 17.1 P/E (13F, x) 19.9 Market P/E (13F, x) 9.5 KOSPI 1,923.91 Market Cap (Wbn) 1,5 Shares Outstanding (mn) 1 Free Float (%) 51.3 Foreign Ownership (%) 2.9 Beta (12M).57 52-Week Low (W) 85,1 52-Week High (W) 14, (%) 1M 6M 12M Absolute -2.4-19.4 11.6 Relative -5.3-16.6 13.3 18 16 14 12 1 8 Share price KOSPI 8/12 12/12 4/13 8/13 Daewoo Securities Co., Ltd. Food & Beverage / Tobacco Woon-mok Baek +822-768-4158 wm.baek@dwsec.com 2Q review: Profit declines, but likely to resume growth in 2H reported below consensus 2Q results, with revenue of W236.5bn (+.8% YoY) and operating profit of W2bn (-32.8% YoY). Exports grew, but domestic revenue contracted in the quarter. By product, we believe ice cream revenue fell amid unfavorable weather conditions and a high base of comparison. We estimate dairy revenue rose more than 3% YoY, driven by increased exports of banana milk. Operating profit declined due to heavy promotion and marketing spending on ice cream products, which failed to generate strong sales. In 2H, we forecast operating profit to grow 32.2% YoY, recovering from the severe weakness in 2Q thanks to strong export growth of key items (banana-flavored milk, Yoplait). Promotional and marketing spending, which was the key reason behind the profit decline in 1H, should also fall significantly in 2H. Much lies in banana milk s success in China In our view, s biggest driver of long-term growth is exports (ice cream and bananaflavored milk). Exports soared 82.4% to W49bn in 212 and are projected to grow to W8bn in 213 and W13bn in 214. As such, we estimate exports as a percentage of overall revenue to rise from 3.7% in 211 to 11.7% in 214. In addition to the US, Canada and Brazil, now exports its ice creams to Southeast Asian markets (Vietnam, Thailand and Indonesia), where sales of both Melona and Bungeo Samanco have been on the rise. Another important share price catalyst is Chinese sales of banana-flavored milk. Dairy exports (including banana-flavored milk) have surged from W3.9bn in 211 to W14bn in 212, and are forecast to double to W28bn in 213. However, we believe current market expectations on exports (especially to China) are too high. There are other factors that will be important to ensuring success in China, such as building relationships with local distributors and raising brand recognition. We believe banana-flavored milk has strong potential in China. 1) China s milk industry is shifting its focus from merely providing a source of nutrition (plain milk) to adding flavor and characteristics (processed milk). 2) Banana-flavored milk is a brand new category that has potential consumer appeal. Furthermore, 3) the product is distributed primarily through convenience stores, which tend to require less advertising. Also, 4) the item is displayed in the dairy corner (a staple) instead of beverage, which is more sensitive to trends. Maintain Trading Buy, but Lower TP 15% to W115, We maintain our Trading Buy rating and trim our target price to W115, (from W136,). shares have been correcting due to concerns over 2Q earnings weakness and high valuation. In 2H, we expect the firm to return to profit growth on lower expenses. We applied a 2% premium to the 214F sector average P/E, in light of the firm s solid domestic standing, expectations of banana-flavored milk exports to China, and growing exports of ice cream to Asia. FY (Dec.) 12/1 12/11 12/12 12/13F 12/14F 12/15F Revenue (Wbn) 685 721 79 822 883 935 OP (Wbn) 6 5 67 63 74 8 OP margin (%) 8.7 7. 8.4 7.7 8.4 8.6 NP (Wbn) 48 42 51 5 59 64 EPS (W) 4,916 4,266 5,156 5,118 5,999 6,523 ROE (%) 13.9 11. 12.2 11. 11.8 11.6 P/E (x) 11.4 14. 21.7 19.9 17. 15.6 P/B (x) 1.4 1.4 2.4 2. 1.8 1.7 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS BEGINNING ON PAGE 5.
August 16, 213 Table 1. 2Q13 earnings results (Wbn, %) 2Q12 1Q13 2Q13 Growth Actual KDB Daewoo Consensus YoY QoQ Revenue 235 162 237 24 247.8 46. Operating profit 3 3 2 24 27-32.8 57.5 Pretax profit 31 4 22 25 29-3.3 52.3 Net profit 23 2 17 19 22-26.9 819.1 OP margin 12.7 2. 8.5 1. 11. - - NP margin 9.7 1.1 7. 7.9 8.7 - - Note: OP refers to adjusted operating profit; NP refers to net profit attributable to controlling interests estimates Table 2. Quarterly and annual earnings (Wbn, %) 212 213 212 213F 214F 1Q 2Q 3Q 4Q 1Q 2Q 3QF 4QF Annual Annual Annual Revenue 151 235 - - 162 237 267 157 79 822 883 Operating profit 7 3 - - 3 2 4.4 67 63 74 Pretax profit 8 31 - - 4 21 41.9 67 67 78 Net profit 6 23 - - 2 17 31.8 51 5 59 OP margin 4.4 12.7 - - 2. 8.5 14.8.3 8.4 7.7 8.4 NP margin 3.9 9.7 - - 1.1 7. 11.7.5 6.4 6.1 6.7 Revenue growth - - - - 7.1.8 - - 9.5 4. 7.4 OP growth - - - - -5. -32.8 - - 32.6-5. 17.2 Pretax profit growth - - - - -52.9-3.3 - - 22.8-1. 17.1 Net profit growth - - - - -69. -26.9 2.8 -.7 17.2 Note: OP refers to adjusted operating profit; NP refers to net profit attributable to controlling interests estimates Table 3. Revisions to earnings forecasts (Wbn, %) Previous Revised % chg. 13F 14F 15F 13F 14F 15F 13F 14F 15F Revenue 822 875 927 821 883 935 -.1.9.9 - Reflects decline in input costs Operating profit 67 73 77 63 74 8-5.3 2.1 3.9 - Reflects SG&A reduction Pretax profit 7 76 82 67 78 85-4.6 2.3 3.9 Net profit 52 57 61 5 59 64-3.6 3.5 4.7 OP margin 8.1 8.3 8.4 7.7 8.4 8.6 - - - NP margin 6.4 6.5 6.6 6.1 6.7 6.9 - - - Note: OP refers to adjusted operating profit; NP refers to net profit attributable to controlling interests estimates Notes Figure 1. P/E band (Wbn) 16, Figure 2. P/B band (Wbn) 16, 26.5x 2.7x 12, 23.x 12, 2.3x 19.9x 2.x 8, 15.x 8, 1.5x 1.x 1.1x 4, 4, 3 5 7 9 11 13 3 5 7 9 11 13
August 16, 213 Figure 3. Banana-flavored milk is growing both domestically and globally (Wbn) (%) 25 22 Banana-flavored milk (domestic+export) (L) YoY growth (R) 18 15 Figure 4. Yogurt is another steady selling item for (Wbn) (%) 14 Yogurt revenue (L) 2 YoY growth (R) 12 16 19 12 1 12 16 9 13 6 8 8 1 3 6 4 7 4 6 7 8 9 1 11 12 13F 14F 15F 6 7 8 9 1 11 12 13F 14F 15F Figure 5. Export growth is driven by ice cream and bananaflavored milk Figure 6. Export contribution to revenue will rise to 13.9% in 215 (Wbn) 15 Ice cream/snack exports Dairy product exports (Wbn) (%) 15 Export (L) Export contribution to revenue (R) 2 12 12 16 9 9 12 6 6 8 3 3 4 6 7 8 9 1 11 12 13F 14F 15F 6 7 8 9 1 11 12 13F 14F 15F Figure 7. Falling ice cream prices point to possible price hikes Figure 8. Slowing price inflation for dairy products suggest another price hike in the near future (21=1) (21=1) 12 CPI for ice cream 12 CPI for milk CPI for yogurt 11 1 1 8 9 8 6 7 1 3 5 7 9 11 13 Source: Statistics Korea, 4 1 3 5 7 9 11 13 Source: Statistics Korea, 3
August 16, 213 (518 KS/Trading Buy/TP: W115,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F Revenue 79 822 883 935 Current Assets 32 322 361 46 Cost of Sales 539 56 598 634 Cash and Cash Equivalents 62 77 15 14 Gross Profit 251 261 284 31 AR & Other Receivables 67 7 75 79 SG&A Expenses 185 198 21 221 Inventories 44 46 49 52 Operating Profit (Adj) 67 63 74 8 Other Current Assets 3 31 33 35 Operating Profit 67 63 74 8 Non-Current Assets 244 266 283 299 Non-Operating Profit 1 4 4 5 Investments in Associates Net Financial Income -5-5 -6-7 Property, Plant and Equipment 23 225 239 252 Net Gain from Inv in Associates -1 Intangible Assets 2 2 2 2 Pretax Profit 67 67 78 85 Total Assets 546 588 644 74 Income Tax 17 16 19 21 Current Liabilities 8 82 88 93 Profit from Continuing Operations 51 5 59 64 AP & Other Payables 56 58 62 66 Profit from Discontinued Operations Short-Term Financial Liabilities 2 1 1 1 Net Profit 51 5 59 64 Other Current Liabilities 22 23 25 26 Controlling Interests 51 5 59 64 Non-Current Liabilities 28 26 26 27 Non-Controlling Interests Long-Term Financial Liabilities 8 8 8 8 Total Comprehensive Profit 52 54 63 68 Other Non-Current Liabilities 12 11 11 11 Controlling Interests 52 54 63 68 Total Liabilities 17 18 114 12 Non-Controlling Interests Controlling Interests 436 477 527 582 EBITDA 88 83 95 13 Capital Stock 5 5 5 5 FCF (Free Cash Flow) 35 26 37 43 Capital Surplus 65 65 65 65 EBITDA Margin (%) 11.1 1.1 1.8 11. Retained Earnings 336 374 419 47 Operating Profit Margin (%) 8.4 7.7 8.4 8.6 Non-Controlling Interests 3 3 3 3 Net Profit Margin (%) 6.4 6.1 6.7 6.9 Stockholders' Equity 439 48 53 584 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F Cash Flows from Op Activities 67 64 71 77 P/E (x) 21.7 19.9 17. 15.6 Net Profit 51 5 59 64 P/CF (x) 15.3 14.4 12.5 11.6 Non-Cash Income and Expense 41 33 36 39 P/B (x) 2.4 2. 1.8 1.7 Depreciation 21 19 21 22 EV/EBITDA (x) 11. 1.3 8.6 7.6 Amortization EPS (W) 5,156 5,118 5,999 6,523 Others -7-2 -2-2 CFPS (W) 7,35 7,74 8,146 8,817 Chg in Working Capital -17-2 -6-5 BPS (W) 46,28 5,523 55,557 61,115 Chg in AR & Other Receivables -7-3 -5-4 DPS (W) 1,4 1,5 1,5 1,5 Chg in Inventories -4-2 -3-3 Payout ratio (%) 24.4 26.3 22.4 2.6 Chg in AP & Other Payables -5 2 4 4 Dividend Yield (%) 1.3 1.5 1.5 1.5 Income Tax Paid -9-18 -19-21 Revenue Growth (%) 9.5 4. 7.4 5.9 Cash Flows from Inv Activities -112-36 -29-28 EBITDA Growth (%) 25. -6. 15.5 8.1 Chg in PP&E -31-41 -35-35 Operating Profit Growth (%) 32.6-5. 17.2 8.4 Chg in Intangible Assets EPS Growth (%) 2.9 -.7 17.2 8.7 Chg in Financial Assets -84 Accounts Receivable Turnover (x) 12.9 13.1 13.3 13.2 Others 4 6 6 7 Inventory Turnover (x) 18.8 18.2 18.5 18.4 Cash Flows from Fin Activities -11-13 -14-14 Accounts Payable Turnover (x) 2. 22.7 23.1 22.9 Chg in Financial Liabilities -1 ROA (%) 9.8 8.9 9.6 9.5 Chg in Equity ROE (%) 12.2 11. 11.8 11.6 Dividends Paid -11-12 -13-13 ROIC (%) 18.4 16.4 18. 18.3 Others Liability to Equity Ratio (%) 24.4 22.5 21.6 2.5 Increase (Decrease) in Cash -56 15 28 35 Current Ratio (%) 379.7 392.6 49.7 434.9 Beginning Balance 118 62 77 15 Net Debt to Equity Ratio (%) -34.5-34.7-36.7-39.3 Ending Balance 62 77 15 14 Interest Coverage Ratio (x) 192.7 185.5 229.6 248.9 estimates
August 16, 213 Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. (W) 16, 14, 12, 1, 8, 6, 4, 2, 8/11 2/12 8/12 2/13 8/13 Stock Ratings Industry Ratings Buy Relative performance of 2% or greater Overweight Fundamentals are favorable or improving Trading Buy Relative performance of 1% or greater, but with volatility Neutral Fundamentals are steady without any material changes Hold Relative performance of -1% and 1% Underweight Fundamentals are unfavorable or worsening Sell Relative performance of -1% * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. 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Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. 5
August 16, 213 Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2 (Financial Promotion) Order 25 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul 15-716 Korea Two International Finance Centre Suites 25-212 8 Finance Street, Central Hong Kong 32 Park Avenue, 31st Fl. New York, NY 122 United States Tel: 82-2-768-326 Tel: 85-2-2514-134 Tel: 1-212-47-1 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Representative Office Tower 42, Level 41 25 Old Broad Street London EC2N 1HQ United Kingdom 6 Battery Road, #11-1 Singapore, 4999 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 1-5 Japan Tel: 44-2-7982-816 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office Suite 262, Twin Towers (East) B-12 Jianguomenwai Avenue Chaoyang District, Beijing 122 China Unit 13, 28 th Floor, Hang Seng Bank Tower 1 Lujiazui Ring Road Pudong New Area, Shanghai 212 China Centec Tower 72-74 Nguyen Thi Minh Khai Street Ward 6, District 3, Ho Chi Minh City Vietnam Tel: 86-1-6567-9699 Tel: 86-21-513-6392 Tel: 84-8-391-6 6