Company Update LG International (112) Poor 3Q expected to be just a blip Jaeseung Baek Analyst jaeseung.baek@samsung.com 822 22 7794 LG International (LGI) yesterday reported that its consolidated sales rose 3.4% to KRW2.9t in 3Q, but its operating profit plunged 61.7% q-q to KRW21.6b, which missed the consensus by 55%. One-offs and structural factors led most of LGI s business to suffer q-q earnings declines, and while coal trading ASPs are likely on the rise (following recent hikes in spot prices), intensifying competition in the business along with low logistics margins (in order to win contracts) are not set to change anytime soon. We revise down our 217 operating profit forecast on LGI by 17% to KRW187.2b and thus we cut our 12-month target price by 14.3% to KRW36,, but our BUY rating is unchanged, as its: 1) earnings momentum could be lifted by coal price hikes and when its gas-to-liquids [GTL] project in Turkmenistan goes operational; and 2) logistics business continues to enjoy sales volume growth while a focus shift to profitability could soon boost earnings. Share-price weakness due to the poor 3Q results ought to present a good buying opportunity as the firm s earnings are poised to perk up in 217. AT A GLANCE Target price KRW36, (14.5%) Current price KRW31,45 Market cap KRW1.2t/USD1.1b Shares (float) 38,76, (72.1%) 52-week high/low KRW39,65/KRW27,1 Avg daily trading value (6-day) KRW4.3b/ USD3.8m ONE-YEAR PERFORMANCE LG International (%) 1M 6M 12M -1.7-12.8-1. Vs Kospi (%pts) -9.2-12.5-8.5 KEY CHANGES (KRW) New Old Diff Recommend. BUY BUY Target price 36, 42, -14.3% 216E EPS 2,255 2,958-23.7% 217E EPS 2,736 3,311-17.4% SAMSUNG vs THE STREET No of estimates 1 Target price 44,1 Recommendation 4. BUY : 5 / BUY: 4 / HOLD: 3 / SELL: 2 / SELL : 1 WHAT S THE STORY? 3Q review: LG International (LGI) yesterday reported that its consolidated sales rose 3.4% to KRW2.9t in 3Q, but its operating profit plunged 61.7% q-q to KRW21.6b to miss the consensus by 55%, which we attribute to: 1) one-offs eg, delayed oil shipments, difficulties in securing vessels amid Hanjin Shipping s woes, and unexpectedly poor project management profits; and 2) structural factors eg, intensifying coal trading competition and price wars in logistics. With the all-round q-q earnings declines owing mostly to structural factors that should continue, we cut our 217 operating profit forecast on the firm by 17% to KRW187.2b. Earnings growth ahead: We revise down our 12-month target price on LGI by 14.3% to KRW36,, but our BUY rating is unchanged, as the firm s: 1) earnings momentum could be lifted by coal price hikes and when its gas-to-liquids [GTL] project in Turkmenistan goes operational; and 2) logistics business continues to enjoy sales volume growth while a focus shift to profitability could soon boost earnings. Share-price weakness due to the poor 3Q results might nevertheless offer a good buying opportunity as the company s earnings are poised to perk up in 217. SUMMARY OF 3Q RESULTS 3Q16 Chg Diff (%) (% y-y) (% q-q) Samsung Consensus Sales 2,941.9 (18.7) 3.4 (8.5) (8.2) Operating profit 21.6 (27.7) (61.7) (51.7) (55.3) Pre-tax profit 3.8 166.7 (26.7) (4.4) (16.6) Net profit 28. 5,349.1 (8.4) 15.9 (3.4) Margins (%) Operating profit.7 Pre-tax profit 1. Net profit 1. Source: Company data, Samsung Securities estimates VALUATION SUMMARY Multiples (x) 215 216E 217E P/E 17.5 13.9 11.5 P/B.9 1..9 EV/EBITDA 17.3 1.7 9.5 Div yield (%).6.6.6 EPS growth (% y-y) 7.2 25.3 21.3 ROE (%) 5.3 7. 7.9 Per-share data (KRW) EPS 1,799 2,255 2,736 BVPS 33,876 32,158 34,7 DPS 2 2 2
Table 1. Results and forecasts (consolidated) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16A 4Q16E 215 216E 217E Sales 2,644.9 3,22.9 3,617.7 3,759. 3,15.3 2,845.6 2,941.9 3,41.7 13,224.5 11,844.5 12,713.2 Resource development 78.8 82. 72. 8. 57. 49.4 35. 445.6 3,12.8 1,775. 2,25. E&P 154.3 16.7 154. 147. 133.4 131.5 125. 174.4 616. 564.2 823.6 Coal 115.2 117.5 114.4 112.8 14.4 97.1 95.5 122.7 46. 419.7 657.1 Oil 28.1 32.7 28.6 23.2 16.8 22.7 18.1 4.4 112.6 98.1 116.4 Other 11. 1.5 11. 1.9 12.1 11.7 11.3 11.3 43.5 46.4 5.2 Trading 626.5 659.3 566. 653. 436.6 277.9 225. 271.2 2,54.8 1,21.8 1,426.4 Industrial materials 1,81.2 2,44.1 2,397.7 2,289. 1,74.4 1,716.3 1,861.9 1,877.2 8,541. 7,195.9 7,436.5 Project 54.3 61.3 71.9 68.7 52.2 79.5 66.4 72.1 256.2 27.2 292.9 Trading 1,755.9 1,982.8 2,325.8 2,22.3 1,688.2 1,636.8 1,795.5 1,85.1 8,284.8 6,925.6 7,143.6 Distribution. 338.8 5. 67. 74.9 719.9 73. 718.8 1,58.8 2,873.6 3,26.7 Operating profit 2.9 3.3 29.9.6 44.6 56.4 21.6 38.7 81.7 161.3 187.2 Resources/development 3.2 1.2 (37.2) (63.1) 11.6 16.9 (1.7) 11.4 (95.9) 38.2 59.4 Coal 14. 13.9 11. 4.8 15.8 11.5 4.9 6.3 43.7 38.5 46.2 Oil (4.2).8 (3.8) (.9) (4.7) 2.8 (7.4) 3.8 (8.1) (5.5). Other (1.7) (13.5) (44.4) (67.).5 2.6.8 1.4 (135.6) 5.3 13.2 Adjustment 4.1....... 4.1.. Industrial material 17.7 15.1 46. 45. 7. 2.7 12.1 12.5 123.8 52.3 59.1 Project 4.3 4.5 11. 29.2. 13. 5. 5. 49. 23.1 28.1 Trading 13.4 1.6 35. 15.8 7. 7.7 7.1 7.4 74.8 29.1 3.9 Other. (.) (.).. (.).. (.) (.). Distribution. 14. 21.1 18.7 26. 18.8 11.2 14.9 53.8 7.9 68.8 Operating margin (%).8.9.8. 1.5 2..7 1.3.6 1.4 1.5 Resources/development.4.1 (5.2) (7.9) 2. 4.1 (.5) 2.6 (3.1) 2.2 2.6 Industry material 1..7 1.9 2..4 1.2.6.7 1.4.7.8 Distribution. 4.1 4.2 2.8 3.7 2.6 1.5 2.1 3.6 2.5 2.3 Table 2. Forecast revisions 216E 217E Before After Diff. (%) Before After Diff. (%) Sales 12,241 11,845 (3.2) 12,843 12,713 (1.) Operating profit 2 161 (19.3) 224 187 (16.6) Pre-tax profit 163 138 (14.9) 183 147 (19.4) Net profit 116 13 (11.4) 137 111 (19.4) EPS (KRW) 2,958 2,255 (23.7) 3,311 2,736 (17.4) 2
Chart 1. Coal and oil prices (USD/tonne) 13 12 Dubai oil (RHS) 11 1 9 8 7 Coal (LHS) 6 5 4 212 213 214 215 216 Source: Bloomberg (USD/bbl) 14 12 1 8 6 4 2 Chart 2. Quarterly pre-tax profit (1Q15-4Q16E) 6. 5. 4. 3. 2. 1.. Operating profit Operating profit excluding loss on derivatives* Pre-tax profit** Note: * 3Q15 figure excludes a one-off gain of KRW2b ** 4Q15 figure excludes KRW3b in impairment losses Source: Samsung Securities Chart 3. Coal profits* (KRW'/tonne) 8 7 6 5 4 3 Coal-oil price spread (LHS) 2 Profit from coal (RHS)* 1 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 Note: * Sums operating and equity-method profits 3 25 2 15 1 5 Chart 4. China Containerized Freight Index (Indexed: Jan 1, 1998 = 1) 1,4 1,3 1,2 1,1 1, 9 8 7 6 211 212 213 214 215 216 Source: Bloomberg Chart 5. LGI: P/E band Chart 6. LGI: P/B band (KRW) 9, (KRW) 12, 8, 7, 6, 5, 4, 3, 2, 1, 212 213 214 215 216 25x 2x 15x 1x 5x 1, 8, 6, 4, 2, 25 27 29 211 213 215 2.5x 2.x 1.5x 1.x.5x 3
Table 3. Trading companies: Global peer valuations Sales Operating profit Net profit EPS growth P/E ROE P/B EBITDA growth EV/ EBITDA Operating margin (216E) (216E) (216E) (CAGR*, %) (216E, x) (216E, %) (216E, x) (CAGR*, %) (216E, x) (216E, %) LG International 12,713 187 111 21.3 11.5 7.9.9 11.7 9.5 1.5 Mitsubishi 78,182 2,463 3,662 2.5 11.1 7.2.8 16.2 14.5 3.2 Mitsui 52,36 2,2 2,28 (.4) 12.5 6.3.7 4.7 12.5 3.9 Marubeni 131,329 1,26 1,77 12.7 6.1 11.3.6 9.9 12.1 1. Sumitomo 79,589 1,228 1,795 19.9 9. 7.3.6 11. 14.6 1.5 Itochu 54,6 3,9 3,891 2.8 5.6 15..8 4.7 9.7 5.5 Toyota Tsusho 82,326 1,689 882 13.4 1.6 9..9 6.4 7.6 2.1 Sojitz 42,735 471 453 8.9 8.2 8.2.6 8. 1.9 1.1 Trading business average** 8.5 9. 9.2.7 8.7 11.7 2.6 Hyundai Glovis 16,345 835 64 7.4 11.1 15.9 1.7 7.7 7.5 5.1 Samsung SDS 8,767 77 513 2.6 24.8 9.8 2.4 6.7 9.3 8.1 Logistics business average 5. 17.9 12.8 2. 7.2 8.4 6.6 ADM 73,469 2,57 1,888 32.8 14.8 9. 1.4 19.3 9.3 3.4 Noble Group 72,258 595 276 73.3 4.6 5.4.3 33.1 6.9.8 Bunge 48,773 1,563 974 2.9 1.3 11.7 1.1 11.3 6.4 3.2 Vale 32,34 4,988 1,836 (51.5) 21.7 4..8 (3.1) 7.1 15.6 Rio Tinto 38,99 6,915 4,498 1.9 15.3 9.3 1.5 2.2 6.4 18.1 BHP Billiton 39,856 8,439 4,685 17. 22.3 6.7 1.6 4.2 6.6 21.2 Teck Resources 7,947 1,663 95 83.9 11.6 6..9 33.8 6. 2.9 Boliden 5,68 84 58 33.9 12.6 15.6 1.7 21. 6.1 14.2 FMG 7,175 1,32 732 (49.6) 2.6 7.5 1.3 (22.6) 6.3 18.4 Resource development business average 18.1 14.9 8.3 1.2 11. 6.8 12.9 Total average** 12.9 12.9 9.2 1.1 9.7 8.9 8.2 Note: * 215-217 CAGR; ** excludes LGI Table 4. Sum-of-the-parts valuation Consolidated value (A) 1,413.9 Trading business 154.3 216 net profit 17.1 Target P/E (x)* 9. Pantos Logistics 915.8 216 net profit 6.1 Target P/E (x)** 15.2 Other business (including E&P) 343.8 216 net profit 28.9 Target P/E (x)*** 11.9 Enterprise value 1,413.9 Shares outstanding 38,76, Target price (KRW) 36, Note: * Average of global peers; ** 15% discount to average of domestic peers *** 2% discount to average of global mining firms 4
Income statement Year-end Dec 31 214 215 216E 217E 218E Sales 11,372 13,224 11,845 12,713 12,917 Cost of goods sold 1,873 12,711 11,123 11,966 12,145 Gross profit 499 514 722 747 773 Gross margin (%) 4.4 3.9 6.1 5.9 6. SG&A expenses 327 432 561 56 577 Operating profit 172 82 161 187 195 Operating margin (%) 1.5.6 1.4 1.5 1.5 Non-operating gains (losses) (159) (297) (23) (4) (2) Financial profit 271 327 222 (1) 18 Financial costs 317 374 248 47 46 Equity-method gains (losses) (8) (221) 8 8 8 Other (16) (29) (6) () Pre-tax profit 13 (215) 138 147 175 Taxes 26 2 36 37 44 Effective tax rate (%) 29. (.9) 25.7 25. 25. Profit from continuing operations (14) (217) 13 111 131 Profit from discontinued operations Net profit (14) (217) 13 111 131 Net margin (%) (.1) (1.6).9.9 1. Net profit (controlling interests) (13) (235) 13 111 131 Net profit (non-controlling interests) (1) 18 EBITDA 238 137 211 24 25 EBITDA margin (%) 2.1 1. 1.8 1.9 1.9 EPS (parent-based) (KRW) (34) (6,74) 2,656 2,852 3,387 EPS (consolidated) (KRW) (355) (5,61) 2,656 2,852 3,387 Adjusted EPS (KRW)* 1,678 1,799 2,255 2,736 2,875 Balance sheet Year-end Dec 31 214 215 216E 217E 218E Current assets 2,83 3,74 3,43 3,219 3,351 Cash & equivalents 48 529 517 54 563 Accounts receivable 1,53 1,432 1,468 1,543 1,583 Inventories 1,47 724 684 737 786 Other current assets 25 389 374 399 419 Fixed assets 2,67 2,39 2,367 2,429 2,497 Investment assets 927 672 953 975 998 Tangible assets 96 334 37 41 455 Intangible assets 85 99 99 99 99 Other long-term assets 238 314 54 54 54 Total assets 4,897 5,383 5,41 5,648 5,848 Current liabilities 2,352 2,589 2,549 2,685 2,765 Accounts payable 1,476 1,55 1,47 1,539 1,559 Short-term debt 463 423 423 423 423 Other current liabilities 414 616 655 722 782 Long-term liabilities 979 1,251 1,223 1,223 1,219 Bonds & long-term debt 862 1,112 1,112 1,112 1,112 Other long-term liabilities 117 139 111 111 17 Total liabilities 3,332 3,84 3,772 3,98 3,984 Owners of parent equity 1,427 1,199 1,294 1,396 1,52 Capital stock 194 194 194 194 194 Capital surplus 12 12 12 12 12 Retained earnings 1,11 858 953 1,56 1,179 Other 3 46 45 45 45 Non-controlling interests equity 139 344 344 344 344 Total equity 1,565 1,543 1,638 1,74 1,864 Net debt 989 1,156 1,151 1,128 1,14 Cash flow statement Year-end Dec 31 214 215 216E 217E 218E Cash flow from operations 348 298 349 372 368 Net profit (14) (217) 13 111 131 Non-cash profit and expenses 252 473 221 252 234 Depreciation 13 18 37 4 43 Amortization 53 36 13 13 13 Other 187 418 172 199 179 Changes in A/L from operating activities 145 11 25 9 3 Cash flow from investments (23) (278) (42) (394) (395) Change in tangible assets (8) (26) (13) (16) (19) Change in financial assets 95 66 (333) (333) (333) Other (11) (317) (56) (45) (43) Cash flow from financing (237) 28 4 45 5 Change in debt (165) 23 Change in equity () Dividends (23) (16) Other (49) (159) 4 45 5 Change in cash 95 49 (12) 23 24 Cash at beginning of year 385 48 529 517 54 Cash at end of year 48 529 517 54 563 Gross cash flow 239 256 324 363 366 Free cash flow 34 271 335 355 349 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 31 214 215 216E 217E 218E Growth (%) Sales (5.8) 16.3 (1.4) 7.3 1.6 Operating profit 75. (52.5) 97.5 16.1 4.3 Net profit nm nm nm 7.4 18.7 Adjusted EPS** 35.5 7.2 25.3 21.3 5.1 Per-share data (KRW) EPS (parent-based) (34) (6,74) 2,656 2,852 3,387 EPS (consolidated) (355) (5,61) 2,656 2,852 3,387 Adjusted EPS** 1,678 1,799 2,255 2,736 2,875 BVPS 37,443 33,876 32,158 34,7 37,619 DPS (common) 3 2 2 2 2 Valuations (x) P/E*** 18.7 17.5 13.9 11.5 1.9 P/B***.8.9 1..9.8 EV/EBITDA 9.2 17.3 1.7 9.5 9.1 Ratios (%) ROE 4.5 5.3 7. 7.9 7.6 ROA (.3) (4.2) 1.9 2. 2.3 ROIC (11.3) 4.7 6.2 7.1 7.2 Payout ratio (87.9) (3.3) 7.5 7. 5.9 Dividend yield (common) 1..6.6.6.6 Net debt to equity 63.2 74.9 7.3 64.8 59.3 Interest coverage (x) 3.8 1.7 3.4 4. 4.2 5
Compliance notice - As of Oct 26, 216, the covering analyst(s) did not own any shares, or debt instruments convertible into shares, of any company covered in this report. - As of Oct 26, 216, Samsung Securities holdings of shares and debt instruments convertible into shares of each company covered in this report would not, if such debt instruments were converted, exceed 1% of each company s outstanding shares. - This report has been prepared without any undue external influence or interference, and accurately reflects the views of the analyst(s) covering the company or companies herein. - All material presented in this report, unless specifically indicated otherwise, is under copyright to Samsung Securities. - Neither the material nor its content (including copies) may be altered in any form, or by any means transmitted, copied, or distributed to another party, without prior express written permission from Samsung Securities. - This memorandum is based upon information available to the public. While we have taken all reasonable care to ensure its reliability, we do not guarantee its accuracy or completeness. This memorandum is not intended to be an offer, or a solicitation of any offer, to buy or sell the securities mentioned herein. Samsung Securities shall not be liable whatsoever for any loss, direct or consequential, arising from the use of this memorandum or its contents. Statements made regarding affiliates of Samsung Securities are also based upon publicly available information and do not necessarily represent the views of management at such affiliates. - This material has not been distributed to institutional investors or other third parties prior to its publication. Target price changes in past two years (KRW) 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, Oct 14 Apr 15 Oct 15 Apr 16 Oct 16 Rating changes in past two years Date 214/1/27 215/1/21 4/2 5/12 12/3 216/2/4 4/4 7/7 1/1 1/27 Recommendation HOLD BUY BUY BUY BUY BUY BUY BUY BUY BUY Target price (KRW) 32, 38, 4, 47, 45, 38, 42, 45, 42, 36, Samsung Securities uses the following investment ratings. Company BUY Expected to increase in value by 3% or more within 12 months and is highly attractive within sector BUY Expected to increase in value by 1% or more within 12 months HOLD Expected to increase/decrease in value by less than 1% within 12 months SELL Expected to decrease in value by 1% or more within 12 months SELL Expected to decrease in value by 3% or more within 12 months Percentage of ratings in 12 months prior to Jun 3, 216 BUY (71.2%) HOLD (28.8%) SELL (%) Industry OVERWEIGHT Expected to outperform market by 5% or more within 12 months NEUTRAL Expected to outperform/underperform market by less than 5% within 12 months UNDERWEIGHT Expected to underperform market by 5% or more within 12 months 6
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