(027410 KS) No need to overreact Retail Results Comment February 12, 2016 (Maintain) Buy Two important disclosures Alongside its 4Q15 earnings release, made two important disclosures. First, the company said that it has agreed to acquire an 85.2% stake in Bowkang Icheon (the operator of Phoenix Springs Country Club) for W130.1bn through a third-party allotment following a full capital reduction of Bokwang Icheon s existing shares. Second, the company raised its dividend to W1,200 per share from W600 a year earlier. Even after considering the sharp rise in net profit, payout ratio jumped from 14% to 20.0%. Target Price (12M, W) 210,000 Share Price (02/11/16, W) 183,500 Expected Return 14% OP (15F, Wbn) 184 Consensus OP (15F, Wbn) 189 EPS Growth (15F, %) 48.8 Market EPS Growth (15F, %) 19.9 P/E (15F, x) 27.9 Market P/E (15F, x) 11.3 KOSPI 1,861.54 Market Cap (Wbn) 4,546 Shares Outstanding (mn) 25 Free Float (%) 37.4 Foreign Ownership (%) 29.2 Beta (12M) 1.85 52-Week Low 83,700 52-Week High 231,500 (%) 1M 6M 12M Absolute -7.1-16.6 108.5 Relative -5.4-11.0 118.0 330 KOSPI 280 230 180 130 The acquisition is indeed dismaying as it has little to offer in terms of synergy with the core convenience store business. Still, we advise against reacting too negatively to the news, given that 1) the acquisition price is not demanding, considering the company s W660bn net cash, 2) Phoenix Springs land assets are valued at around W150bn, and 3) the deal essentially removes potential risks related to the Bokwang Group. The latest dividend hike also shows the company remains committed to enhancing its shareholder returns. 4Q15 earnings slightly miss, but what matters is what happens after 1Q16 For 4Q15, recorded consolidated revenue of W1.13tr (+29.8% YoY) and operating profit of W35.5bn (+17.4% YoY). Revenue came in slightly above the consensus, but operating profit was below both the consensus and our projection. Same-store sales (SSS) growth remained robust at 17%, and store count also continued to grow, with 267 stores added in the quarter. We believe the company s recent efforts to strengthen its fresh food category (lunch boxes, sandwiches, etc.) are driving strong sales. The disappointing operating profit was attributable to gross margin declining again as a result of the loss of rebates from VAN companies. Operating profit growth should turn negative in 1Q16, but resume in 2Q16 on the back of solid top-line expansion and a pickup in margins. The second quarter and the subsequent period should provide an important gauge of the company s long-term earnings growth prospects. Maintain Buy and Raise TP to W210,000 We slightly lift our target price on to W210,000 to reflect our earnings revisions following the company s larger-than-expected store addition and top-line growth. Weak earnings momentum in 1Q16 and the Bokwang Icheon deal could temporarily dampen investor sentiment. However, for investors betting on the growth of the convenience store industry, we think it is important not to overreact to the deal, as we believe the industry s growth prospects and the company s competitive strength remain firmly intact. 80 2.15 6.15 10.15 2.16 Daewoo Securities Co., Ltd. [Retail] Aiden Lee +822-768-3297 aiden.lee@dwsec.com FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 3,130 3,368 4,334 5,041 5,560 OP (Wbn) 105 124 184 211 247 OP margin (%) 3.4 3.7 4.2 4.2 4.4 NP (Wbn) 69 102 152 166 195 EPS (W) 2,796 4,125 6,138 6,710 7,857 ROE (%) 35.6 27.0 23.8 21.1 20.4 P/E (x) - 18.5 27.9 27.3 23.4 P/B (x) - 3.4 6.0 5.3 4.4 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the t U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Acquisition of Bokwang Icheon Overview Bokwang Icheon operates the Phoenix Springs Country Club, a membership-based, 18-hole premium golf club conveniently located two minutes from the South Icheon Interchange and 50 minutes from Gangnam, Seoul. has agreed to acquire an 85.2% stake in Bokwang Icheon for W130.1bn including a debt-to-equity swap (converting membership fees to equity) worth W2.1bn through a third-party allotment following a full capital reduction of Bokwang Icheon s existing shares. The remaining stake will be acquired by a JoongAng Daily affiliate and related parties. Due to the full capital reduction, the acquisition amount will flow into the company rather than Bokwang Icheon s existing shareholders, and will likely be used to improve s financials and pursue new businesses. Value and estimated earnings of Phoenix Springs Country Club After the return of membership fees following the rights offering, the value of Phoenix Springs equity capital is projected to be W147bn-184bn, with land assets estimated at around W150bn based on book value. As the membership-based golf course is currently performing poorly, BGF Retail plans to convert it into a public course. After the conversion, the course is expected to generate W12-13bn in revenue and W4-4.5bn in operating profit annually. expects Phoenix Springs to turn to profit this year based on debt repayment (W30bn) via disposal of idling land, a likely rise in visitors, and tax benefits (W20bn) for conversion to a public course. In deciding to acquire Phoenix Springs, said it took into account the potential upside to value following conversion to a public course, its robust asset value and cash holdings, and its future earnings outlook. Bokwang Group and is an affiliate of Bokwang Group, as part of its equity is owned by the group s major shareholder. However, following the capital reduction at Bokwang Icheon and the sale of the group s resort business (Bokwang and Bokwang Jeju) to JoongAng Media Network, the group will essentially be dissolved. As such, the deal will sever s connection to the group and remove related risks, which should cause the valuation discount resulting from those risks to dissipate. s financing ability has net cash holdings of roughly W660bn as of end-2015 (on a consolidated basis). Given the company s cash flow of W150-200bn per year, we believe the acquisition will be internally financed. Thus, the W130bn deal is unlikely to harm the company s value. 2
Table 1.. 4Q15 review (Wbn, %) 4Q15P Growth (%) Diff.. (%) 4Q14 3Q15 Preliminary (A) KDB Daewoo Consensus (B) YoY QoQ (A vs. B) Revenue 874 1,206 1,134 1,066 1,109 29.8-6.0 2.3 Operating profit 30 54 36 39 39 17.4-34.6-9.0 OP margin 3.5 4.5 3.1 3.6 3.5-0.3-1.4 Pretax profit 34 58 40 41 44 17.9-31.0-8.9 Net profit 23 43 35 30 33 47.7-19.2 6.5 Notes: Based on consolidated K-IFRS Source: Company data, Bloomberg, Table 2.. Quarterly earnings forecast (Wbn, %) 2015 2016F Growth 2014 2015P 2016F 1Q15 2Q15 3Q15 4Q15P 1Q16F 2Q16F 3Q16F 4Q16F 4Q15 2015P 2016F Revenue 884 1,110 1,206 1,134 1,054 1,309 1,395 1,284 3,368 4,334 5,041 29.8 28.7 16.3 # of convenience stores 8,561 8,813 9,142 9,409 9,594 9,819 10,036 10,179 8,408 9,409 10,179 11.9 11.9 8.2 Sales per store (Wmn) 102 126 132 119 112 136 142 128 404 478 504 15.9 18.3 5.4 Gross profit 213 230 238 219 215 261 280 251 799 900 1,007 8.6 12.6 11.9 Operating profit 42 51 54 36 28 63 74 46 124 184 211 17.4 47.9 15.0 Gross margin 24.1 20.7 19.7 19.3 20.4 20.0 20.0 19.6 23.7 20.8 20.0 OP margin 4.8 4.6 4.5 3.1 2.7 4.8 5.3 3.6 3.7 4.2 4.2 Notes: Based on consolidated K-IFRS; Sales per store calculated based on average number of stores Source: Company data, 3
(027410 KS/Buy/TP: W210,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 3,368 4,334 5,041 5,560 Current Assets 723 929 1,155 1,381 Cost of Sales 2,569 3,434 4,034 4,410 Cash and Cash Equivalents 211 172 341 540 Gross Profit 799 900 1,007 1,150 AR & Other Receivables 25 30 36 37 SG&A Expenses 675 716 796 903 Inventories 63 57 73 74 Operating Profit (Adj) 124 184 211 247 Other Current Assets 424 670 705 730 Operating Profit 124 184 211 247 Non-Current Assets 615 632 605 590 Non-Operating Profit 12 12 8 11 Investments in Associates 10 10 10 11 Net Financial Income 7 1 7 12 Property, Plant and Equipment 369 373 353 337 Net Gain from Inv in Associates 1 1 0 0 Intangible Assets 47 49 36 27 Pretax Profit 136 196 219 258 Total Assets 1,338 1,561 1,760 1,971 Income Tax 35 44 52 62 Current Liabilities 600 690 733 761 Profit from Continuing Operations 101 153 166 197 AP & Other Payables 357 381 406 438 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 133 200 205 197 Net Profit 101 153 166 197 Other Current Liabilities 110 109 122 126 Controlling Interests 102 152 166 195 Non-Current Liabilities 167 157 161 163 Non-Controlling Interests 0 1 0 2 Long-Term Financial Liabilities 129 130 130 130 Total Comprehensive Profit 97 153 166 197 Other Non-Current Liabilities 38 27 31 33 Controlling Interests 98 151 163 193 Total Liabilities 766 847 895 924 Non-Controlling Interests 0 2 3 4 Controlling Interests 559 714 865 1,045 EBITDA 229 291 315 343 Capital Stock 25 25 25 25 FCF (Free Cash Flow) 192 226 210 259 Capital Surplus 15 40 40 40 EBITDA Margin (%) 6.8 6.7 6.2 6.2 Retained Earnings 512 649 800 980 Operating Profit Margin (%) 3.7 4.2 4.2 4.4 Non-Controlling Interests 13 0 0 2 Net Profit Margin (%) 3.0 3.5 3.3 3.5 Stockholders' Equity 572 714 865 1,047 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 260 318 290 329 P/E (x) 18.5 27.9 27.3 23.4 Net Profit 101 153 166 197 P/CF (x) 7.6 13.7 14.4 13.3 Non-Cash Income and Expense 148 156 149 146 P/B (x) 3.4 6.0 5.3 4.4 Depreciation 91 93 91 87 EV/EBITDA (x) 6.8 13.0 12.3 10.6 Amortization 14 15 12 9 EPS (W) 4,125 6,138 6,710 7,857 Others 43 48 46 50 CFPS (W) 10,109 12,518 12,699 13,837 Chg in Working Capital 37 38 21 36 BPS (W) 22,686 28,806 34,917 42,174 Chg in AR & Other Receivables 5-69 -1 0 DPS (W) 600 600 600 600 Chg in Inventories -14 6-17 -1 Payout ratio (%) 14.6 9.7 9.0 7.6 Chg in AP & Other Payables 59 452 18 28 Dividend Yield (%) 0.8 0.3 0.3 0.3 Income Tax Paid -28-34 -52-62 Revenue Growth (%) 7.6 28.7 16.3 10.3 Cash Flows from Inv Activities -256-322 -112-105 EBITDA Growth (%) 7.5 27.1 8.2 8.9 Chg in PP&E -66-90 -72-70 Operating Profit Growth (%) 18.1 48.4 14.7 17.1 Chg in Intangible Assets -9-11 0 0 EPS Growth (%) 47.5 48.8 9.3 17.1 Chg in Financial Assets -169-240 -40-35 Accounts Receivable Turnover (x) 453.5 582.6 614.3 624.0 Others -12 19 0 0 Inventory Turnover (x) 59.9 72.4 77.5 75.4 Cash Flows from Fin Activities 7-35 -10-23 Accounts Payable Turnover (x) 8.9 10.9 12.1 12.4 Chg in Financial Liabilities -264 68 5-8 ROA (%) 8.1 10.5 10.0 10.5 Chg in Equity 0 25 0 0 ROE (%) 27.0 23.8 21.1 20.4 Dividends Paid -10-18 -15-15 ROIC (%) 70.9 149.1 226.9 1,126.4 Others 281-110 0 0 Liability to Equity Ratio (%) 134.0 118.6 103.4 88.3 Increase (Decrease) in Cash 12-38 168 200 Current Ratio (%) 120.6 134.8 157.5 181.5 Beginning Balance 199 211 172 341 Net Debt to Equity Ratio (%) -60.3-65.4-76.9-85.8 Ending Balance 211 172 341 540 Interest Coverage Ratio (x) 11.5 67.2 19.7 23.2 Source: Company data, estimates 4
APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (027410) 02/12/2016 Buy 210,000 11/25/2015 Buy 200,000 10/12/2015 Buy 214,000 06/14/2015 Buy 186,000 03/05/2015 Buy 110,000 (W) 250,000 200,000 150,000 100,000 50,000 0 2 14 2 15 2 16 Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% 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. Equity Ratings Distribution Buy Trading Buy 71.08% 11.76% 17.16% 0.00% * Based on recommendations in the last 12-months (as of December 31, 2015) 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. 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. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. 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 Hold Sell 5
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