Middle East War, High Oil Prices Accelerate EV Shift... "High Margins Expected for Kumho Tire" [Click e-Stock]

Samsung Securities: Buy rating, 7,500-won target price

Samsung Securities set a target price of 7,500 won for tiremaker Kumho Tire, saying the company has posted an operating margin of more than 10% for four consecutive years and is “transforming into a company capable of absorbing external shocks.” Its current share price is 5,430 won, implying 38.1% upside.

Earnings in the second half of the year are expected to be weaker than in the first half. Raw material prices have surged in the wake of the Middle East war, and a 24.4% tariff on Chinese-made tires in Europe has been in effect since July, adding 30 billion to 40 billion won in costs each quarter. Butadiene, a raw material for synthetic rubber, is up 189% from the start of the year; crude oil is up 132%; and carbon black, a tire reinforcement material, is up 22%.

Operating profit in the third quarter is expected to rise 4.6% from a year earlier to 114 billion won, but fall short of the market estimate of 138.1 billion won. Revenue is forecast to come in below the market estimate of 1.26 trillion won, at 1.18 trillion won. The share price has fallen 22.5% over the past month.

Researcher Lim Eunyoung said she expects these pressures to be temporary. “The Middle East war, the biggest burden on earnings, is likely to have a diminishing impact over time,” she said. Kumho Tire plans to reflect higher raw material costs in tire prices. She also viewed the acceleration in the shift to electric vehicles as positive, as more consumers seek to avoid the burden of high oil prices.

Electric vehicles mainly use tires measuring 18 inches or larger because of the weight of their batteries. These high-inch tires are said to generate three to six times the profit per tire of smaller ones. Kumho Tire’s share of electric vehicle tires rose from 9.8% in 2023 to 20.4% last year, and the company plans to increase it to 30% this year.

The company’s financial health has improved markedly, according to the assessment. Its debt-to-equity ratio fell to 138.6% in the first half of this year from 278.2% at the end of 2022, while net debt declined from 1.85 trillion won to 1.02 trillion won. The company has posted an operating margin of more than 10% for four consecutive years since 2023, and its annual cash generated from operating activities ranges from 500 billion to 900 billion won. This puts it in a position to fund most of the cost of investing in new plants with its own funds.

The new plants are seen as a solution to the European tariffs in particular. Once the Hampyeong plant in South Jeolla Province begins mass production in the first quarter of 2028 and the plant in Poland does so in the third quarter of 2028, the company will be able to shift production volumes previously imported from China. With accumulated losses eliminated, the company may also resume dividend payments, which have been suspended since 2007.

Operating profit is expected to fall 5.0% to 547 billion won this year, but rise 15.9% to 634 billion won next year. Revenue this year is forecast at 4.872 trillion won, below the company’s target of 5.1 trillion won.

One risk is the shares held by creditors. Shares received by creditors during the 2010 workout, or corporate restructuring process, account for 13.84% of the company. Researcher Lim said, “The remaining 6.41% stake, excluding the Korea Development Bank’s stake, could come onto the market if the share price exceeds 7,000 won.”

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