Oil and Freight Costs Surge... How Will Hankook Tire Protect Earnings? [Click eStock]

3Q Earnings Expected to Meet Market Expectations Despite Decline
Price Hikes and High-Value-Added Products to Provide Support
Cost Burden to Persist Through Early Next Year

With raw material and logistics costs rising in tandem, Hankook Tire & Technology is facing increased pressure. However, analysts say price hikes and a strategy of expanding sales of high-value-added products should help cushion the impact.

On Oct. 19, Hanwha Investment & Securities forecast consolidated revenue of KRW 5.59 trillion and operating profit of KRW 554.3 billion for Hankook Tire in the third quarter of this year. That would represent a 3.2% increase in revenue and a 5.4% decline in operating profit from the same period last year. While the drop in profit is disappointing, the firm expects results to meet market expectations. In other words, despite mounting cost concerns, the company should at least meet the bar for now.

Looking at the tire division alone, the expected operating margin is 16.4%, down from 19.2% in the same period last year. If the company absorbs the full burden of higher costs, profitability could deteriorate further.

Support is expected to come from selling prices and product mix. Prices were already raised by about 3% last month in Korea and North America, among other markets. Sales growth in high-value-added products, including tires of 18 inches or larger and tires for electric vehicles, is also expected to help.

Winter tires are expected to be a bright spot in Europe. Hanwha Investment & Securities forecast that European revenue would rise 10.9% year over year in the third quarter, as demand for all-weather and winter tires increases. The firm believes that demand for high-value-added products, together with the impact of price increases, can offset some of the cost burden.

The problem is that the impact of rising costs is arriving with a lag. Higher oil prices in the first half of the year and rising ocean freight rates since May are now affecting tire costs. Natural rubber prices are also rising. "The impact of high costs needs to be taken into account through the fourth quarter of this year and the first quarter of next year," said Kim Seong-rae, an analyst at Hanwha Investment & Securities. "Downward revisions to earnings estimates are unavoidable."

Exchange rates are also unlikely to be as favorable as before. A stronger won could reduce the positive impact the company has previously received from exchange rates. This was the backdrop for Hanwha Investment & Securities' 7.3% cut to its target price for Hankook Tire, to KRW 89,000. The stock closed at KRW 64,600 the previous day. However, the firm maintained its "Buy" rating, citing the company's ability to respond with price increases and expand sales of high-value-added products.

The dividend outlook is worth watching. The report forecast a dividend of KRW 3,200 per share this year, including an interim dividend of KRW 900, up KRW 900 from the previous year. The estimated dividend yield, based on the Oct. 16 closing price of KRW 63,000, was about 4.95%.

This content was produced with the assistance of AI translation services.