KT&G: Q1 2024 Results

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Q1 2024 Results1

“Delivers gloomy results, promises earnings turnaround in the second half”

Revenue: ₩1.29Tn (-7.4% year-on-year) => decline driven by the weakness in Health-Functional Food (HFF) and Real Estate businesses, tobacco revenue flattish

EBITDA: ₩297.4Bn (-20.8%)

EBITDA Margin: 23% (-3.9pp)

Operating Profit: ₩236.6Bn (-25.2%) => in addition to the headwinds in HFF and Real Estate businesses, pricing & mix improvements and positive FX variance is more than washed out by the lower cigarette volume and higher cost-of-goods-sold in the Tobacco business   

Net Income: ₩285.6Bn (+4.2%)

EPS: ₩2,478 in Q4 (+6.5%)

KT&G’s FY24 guidance was: “3 core businesses (Cigarettes, NGP and Health-Functional Food) to drive top and bottom line growth while cost headwinds persist”. The Q1 2024 realization is a far cry from the guidance. KT&G aims to accelerate growth in NGP and international cigarette sales while revitalizing the HFF revenue in order to improve earnings in Q2 2024.

Results: Tobacco Division

Key announcement highlights for Q1 2024 (tobacco business only):

– Revenue -0.1% to ₩856.6Bn; Operating Profit -12.7% to ₩206.6Bn => Margin down 27.6% to 24.1%

– Overall volume -2.5% to 25.4Bn sticks (cigarettes -4.2% to 21.9Bn sticks)

– NGP revenue weight in total tobacco: down from 23.3% to 20.6% (due to the re-adjustment of the excessive lil device inventory built in the international markets)

– International (ex-Korea) revenue: 58.3% of the total (flat)

– Conventional – Korea: -3.2% volume decline to 9.2Bn sticks due to the market contraction and despite the SoM growth (up +0.3pp to 66%)

– Conventional – International: -4.9% volume decline (to 12.7Bn sticks) due to the change in revenue recognition in Turkey, FX-driven lower volumes in major African markets and inventory adjustments in APAC – partially offset by strong volume performance in the Middle East. Higher revenue (+10.1%) thanks to the pricing in key regions (including Indonesia and Russia/CIS).

Results: NGP Segment

– Overall NGP volume: +9.9% to 3.5Bn sticks in Q1 2024

– NGP – Korea: Leadership is maintained with SoS is flattish around 45.7% (+0.1pp on sequential basis) despite fierce competition (e.g. more aggressive promotions offered by PMI and BAT). Volume is up +3.6% (to 1.4Bn sticks), revenue is up +1.7%.

– NGP – International (Global Partnership with PMI): Revenue is down -35.6% lower the lower device volumes caused by inventory adjustment (i.e. excessive amount of devices shipped over the last two years). Volume is up +14.7% (to 2.1Bn sticks). Operating profits expand as sales of NGP sticks, the main source of profit in the business, continues to grow => volume growth is significantly below the target communicated during the extension of the global partnership agreement with PMI (i.e. “20% annual growth aimed in NGPs over the next 15 years”). Moreover, lower-than-expected international NGP volume growth resurfaces the concerns about “heated tobacco growth slowdown”.

Summary:

KT&G is frequently criticized to grow its revenue base at the expense of profitability. In Q1 2024, KT&G drew even a worse picture – failing to grow its revenue (-7.4%) and reporting a massive decline (-25.2%) in operating profit. It seems like KT&G was vested more in the election of its new CEO – than properly managing its business – in Q1 2024. Results are weak for the key growth businesses (heated tobacco and international cigarettes) and catastrophic for the others. We believe the Market will offer minimal patience to the newly elected (highly contested) CEO; thereby, it is crucial for KT&G to deliver meaningful margin and operating profit improvement in the rest of FY24. Based on the last closing price, KT&G [as a growth business] trades at a premium to the industry average (11.5x FY24 EPS) – thereby, a de-rating could be in the cards if the earnings turnaround doesn’t come quickly.

References:

  1. https://en.ktng.com/report?cmsCd=CM0044 ↩︎

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