Shinsegae (004170.KS) posted better-than-expected second-quarter earnings, but brokerages have cut their target prices for the stock one after another. Although the earnings recovery at its department stores and duty-free operations remains intact, the firms lowered their target multiples to reflect fears of a consumption slowdown amid heightened stock-market volatility and a decline in department-store valuations.
Korea Investment & Securities cut its target price for Shinsegae to 750,000 won from 900,000 won, a 16.7% reduction, on the 12th. Shinhan Securities lowered its target to 700,000 won from 830,000 won, a cut of about 16%, while DB Securities reduced its target to 650,000 won from 900,000 won, or 27.8%. All three brokerages maintained their "buy" ratings.
The common backdrop for the target cuts is a valuation adjustment in the department-store sector. Reflecting a decline in the valuations of global department-store operators, Shinhan Securities lowered the enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) multiple it applies to the department-store business to 6 from 7. DB Securities likewise said the sector's average multiple had fallen as fears of a consumption slowdown, tied to recent stock-market volatility and declining asset values, became reflected in share prices. Korea Investment & Securities also cut its target multiple to reflect weaker short-term momentum in the department-store industry.
In contrast to the target cuts, assessments of the second-quarter results were positive. Shinsegae's consolidated second-quarter revenue rose 5.1% from a year earlier to 1.7804 trillion won ($12.9 billion). Operating profit jumped 121.8% to 167.1 billion won ($121 million), beating the market consensus by 9.5%. The results reflected strong department-store performance combined with improved earnings at subsidiaries.
The brokerages said second-half department-store growth could slow from the first half, but that the earnings recovery trend itself had not been undermined. Rising numbers of foreign tourists and continued spending by VIP customers are expected to persist, while the increase in depreciation costs may ease in the second half. Shinhan Securities forecast Shinsegae's operating profit at 806.6 billion won this year, while DB Securities projected 767.0 billion won.
"We lowered our target price to reflect weaker industry momentum, but the recent share-price decline driven by market volatility is excessive," said Kim Myung-joo, an analyst at Korea Investment & Securities. Cho Sang-hoon, an analyst at Shinhan Securities, also said, "There is a need to focus on the improving fundamentals of the core business and the strengthened shareholder-return policy," maintaining his top pick rating for the sector.
