[Click e-Stock] "Lotte Chilsung Beverage: Near-Term Earnings Expectations Must Be Lowered Amid Cost Pressures... Target Price Cut"

Shinhan Investment Corp. lowered its target price for Lotte Chilsung Beverage to KRW 140,000 from KRW 145,000 on Tuesday, saying that near-term earnings expectations would inevitably be revised downward as cost pressures persist. It maintained its “Buy” rating.

“The target price cut reflects a 3% downward revision to our earnings estimates due to weak sales and prolonged cost pressures,” said Cho Sang-hoon, an analyst at Shinhan Investment Corp. “The valuation—a 12-month forward price-to-earnings ratio of 12 times—is attractive, but with domestic revenue growth slowing, overseas revenue growth will determine the company’s valuation level over the medium to long term.” He added, “The increased asset value stemming from recent issues surrounding the development of the Seocho-dong site is a factor that could drive a re-rating of the company’s value.”

Lotte Chilsung Beverage posted revenue of KRW 1.0501 trillion in the third quarter of this year, down 2.7% from a year earlier, and operating profit of KRW 57 billion, down 37.9%. “As costs for raw and auxiliary materials mounted amid weak operating conditions at home and abroad, the company’s results came in 30% below the consensus—the average of securities firms’ forecasts,” Cho said.

On a standalone basis, beverage revenue fell 4.7% due to differences in the timing of the holiday period and weak consumption, while operating profit declined 47.7% amid cost pressures for raw and auxiliary materials. Standalone alcoholic beverage revenue rose for the third consecutive quarter, and operating profit increased 24%. The combined revenue of overseas subsidiaries fell 0.9%, while their operating profit dropped 48%. “Overseas subsidiaries have high energy dependence, so cost pressures have had a greater impact than in Korea, leading to a sharper decline in operating profit. However, unlike in Korea, spot prices for raw and auxiliary materials are reflected immediately, and the companies have greater flexibility to raise prices. This should allow earnings to stabilize quickly starting in the fourth quarter,” Cho said.

Overseas operations are key to restoring the company’s value over the medium to long term, he said. “With the company targeting a 50% share of overseas revenue by 2030, there is ample room for earnings to improve if cost efficiencies through ZBB (zero-based budgeting) coincide with revenue growth,” Cho said.

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