Shinhan Investment Securities Analysis: KT&G Benefits from Overseas Market Recovery, Rating Maintain

Shinhan Investment Securities analysts said that KT&G is benefiting from a rebound in overseas market demand, with its share price continuing to rise. They expect revenue in the fourth quarter of last year to grow 2.8%, and set a target share price of KRW 110,000.

According to a report from Chosun Daily on January 19, Shinhan Investment Securities analyzed KT&G, noting that tobacco demand is recovering in overseas markets and that its shareholder-return policy is also strengthening. Shinhan Investment Securities maintained its investment stance on KT&G as “Buy” and kept its target share price at KRW 110,000. As of the previous day, KT&G shares had closed at KRW 83,900.

Shinhan Investment Securities forecasts that KT&G’s sales in the fourth quarter of last year will rise 2.8% year on year to KRW 1.45 trillion, while operating profit is expected to fall 3.8% year on year to KRW 193.8 billion, in line with market expectations.

Analyst Cho Sang-hoon said KT&G’s three core businesses — next-generation products (NGP), overseas cigarettes, and health foods — will drive the company’s growth. He added that KT&G has long been undervalued mainly because of its conservative management strategy and weak cash liquidity, which have resulted in a lower return on equity (ROE) than global peers.

Cho predicted that if KT&G adopts a more aggressive management strategy, focuses on core growth industries, executes capital expenditure (CAPEX), and implements shareholder-return policies, both earnings and the share price will improve. He also noted that overseas tobacco demand from the Middle East is rebounding recently, while high growth in new markets such as Central and South America and at overseas subsidiaries is also continuing.Meanwhile, the long-term contract KT&G reached with Philip Morris International (PMI) for NGP sales is also expected to have a positive impact on the company’s development.

Cho also noted in the report that KT&G can steadily generate profits independently of consumer economic conditions or external uncertainties. Since the share of imported raw materials is small, KT&G is relatively less affected by fluctuations in grain prices, and its strengthened shareholder-return policy has increased its investment appeal.