SEOUL, KOREA - Initiate coverage with BUY and TP W140,000: We initiate coverage of Shinsegae Food with BUY and a TP of W140,000 that equals 15.3x 2013F PE.We applied a higher target multiple than the market given the company’s anticipated top-line growth and OPM improvement. Moreover, Shinsegae Food’s plant at Eumseong, North Chungcheong province, scheduled to come fully on-stream at end-2013 should help bolster sales of home meal replacements (HMR) and private label (PL) merchandise to E-Mart. We believe 2014F sales and OP will grow 21% YoY and 31% YoY, respectively. The stock trades at 10.5x 2013F PE and 8.1x 2014F PE. Although the food materials distribution industry is expected to be sluggish in the near-term, the valuations are fairly attractive considering the industry’s growth potential and the company’s facility expansion.
- Top-line growth with more capacity: From end-2013, the Eumseong plant will ramp up utilization from 20% to 100%. The plant has double the capacity than at Osan and mostly handles HMR, fruit and vegetables and other fresh food. Upon the normal operation of the Eumseong plant, the company will operate four fully geared-up facilities. Icheon plant 1 handles livestock products and fruit and vegetables; Icheon 2 manufactures/processes agricultural/fishery products, noodles, rice cakes, etc.; Osan is in charge of fresh food processing such as HMR and post-harvest fruit ripening. Sales of E-Mart-bound HMR and fresh food should grow fast.
- Shinsegae Food to take on a greater role at E-Mart: Shinsegae Food has E-Mart as a captive client. While E-Mart’s annual sales exceed W12.7trn, Shinsegae Food’s sales contribution stands at only 1.7% or W210bn as of 2012.
Considering a typical 50% weighting of food sales at a discount store, Shinsegae Food’s growth potential for E-Mart-bound sales looks enormous. Moreover, Shinsegae Food should play a bigger role at E-Mart as domestic discount stores will likely pursue fatter margins by improving the quality of merchandise rather than focus on top-line growth.
*Source: Korea Investment & Securities Co.
