LG Household & Health Care raises target price despite below-expectation third-quarter results—what's going on?

[Financial News] NH Investment & Securities raised its target price for LG Household & Health Care from KRW 300,000 to KRW 330,000, even as it forecast the company's third- and fourth-quarter results to fall short of market expectations. The move reflects a reassessment of the company's value based on next year's earnings, as the streamlining of non-core businesses nears completion. The brokerage maintained its Hold rating.
Jung Ji-yoon, an analyst at NH Investment & Securities, explained on the 23rd, "It is difficult to raise expectations for short-term earnings," while noting that "the streamlining of non-core businesses, including the sale of The Avon Company and efforts to sell Haitaihtb, is nearing completion." Jung added, "The stabilization of profitability in the China business and whether core brands in North America can continue to grow will be key factors determining earnings visibility."
LG Household & Health Care's third- and fourth-quarter consolidated revenue was forecast at KRW 1.5683 trillion, with operating profit projected at KRW 96 billion. Revenue is expected to decline 1% year on year, while operating profit is projected to rise 108%. Operating profit is expected to come in 13% below market expectations.
By business segment, cosmetics revenue was projected at KRW 653.5 billion and operating profit at KRW 18 billion. Duty-free revenue was expected to rise 137% year on year to KRW 90.8 billion, restoring a profit margin in the 10% range. China revenue, however, was forecast to decline 7% to KRW 136.4 billion.
Jung forecast, "In China, losses will inevitably widen from the previous quarter due to the seasonal off-season, new product promotions and the restructuring of the online business."
In North America, attention is focused on the growth of the existing business following the sale of The Avon Company. Third- and fourth-quarter North American revenue was projected at KRW 156.8 billion, up 2% year on year. After accounting for the impact of excluding The Avon Company from the consolidated results, the existing business is expected to post double-digit growth.
Dr. Groot, in particular, is seen as becoming a key growth brand in North America. Its share of revenue from LG Household & Health Care's existing North American business rose from 30% in the second half of last year to 50% in the first quarter of this year and 60% in the second quarter. However, marketing costs related to Sephora placements and new product launches are expected to be concentrated in the second half of the year.
Jung said, "We need to see the streamlining of non-core businesses reach completion and confirm improved profitability in the China and North American businesses over the medium to long term."
[email protected] Bae Han-geul Reporter