Earnings expectations lowered, but 78% upside... Silicon2 target price cut

[Financial News] Sangsangin Investment & Securities Co., Ltd. cut its target price for Silicon2 by 6.9%, from 58,000 won to 54,000 won, forecasting that the company’s third- and fourth-quarter results would fall short of market expectations. Profitability is expected to weaken due to falling exchange rates and customs clearance delays in Europe, but the company’s global distribution network continues to expand, particularly in North America and Latin America, the firm said. It maintained its “Buy” rating.
Song Ji-yeon, an analyst at Sangsangin Investment & Securities Co., Ltd., said on the 26th, “We have lowered our short-term earnings estimates, but the medium- to long-term growth potential from the expansion of the global distribution network remains intact.” Compared with the closing price of 30,250 won on the 23rd, the target price implies upside potential of 78.5%.
Sangsangin Investment & Securities Co., Ltd. forecast third- and fourth-quarter consolidated revenue of 420.5 billion won and operating profit of 77.4 billion won for Silicon2. These figures represent year-over-year increases of 40.5% and 22.7%, respectively, but operating profit is expected to fall short of the market estimate of 84 billion won.
By region, European revenue is expected to rise 68.5% year over year to 171.7 billion won, but edge down slightly from the previous quarter. The combined impact of a decline in the won-euro exchange rate, customs clearance delays that have continued since the first half of the year, and fewer local business days due to extreme heat is behind the outlook.
Profitability is also expected to come under pressure. The third-quarter operating margin is estimated at 18.4%, down 2.2 percentage points from the previous quarter. The estimate factors in a lower gross margin due to falling exchange rates, higher labor costs from expanding the overseas sales workforce, and the possibility of increased advertising and promotional expenses.
By contrast, growth is expected to continue in North America and Latin America. North American revenue is forecast to rise 34.7% year over year to 97.8 billion won. Despite currency headwinds, supply to major retailers such as Sephora and Target is expanding, with Ulta Beauty at the forefront, the firm said.
Latin American revenue is forecast to surge 111.6% year over year to 32.4 billion won. Demand for Korean cosmetics was found to be strong among local distributors in Mexico, as well as wholesalers in Brazil and Paraguay.
“The fourth quarter is seasonally slow, but there is room for sales in Europe to recover as customs clearance delays are resolved,” Song said. “Sales growth to major retailers in North America and expansion in Latin America are also continuing.”
As sales to global distributors have grown to account for a share in the 30% range, the company is also diversifying its customer base. Silicon2 invested about 56 billion won in South Korea to acquire a 30,000-square-meter logistics warehouse, and its Japanese subsidiary is expected to record its first sales between the end of this year and early next year. In Brazil, the company is also pursuing plans to establish a local subsidiary and build a logistics warehouse early next year.
Song said that “it is particularly positive that sales to global retailers have grown to account for a share in the 30% range, diversifying the customer base,” and expressed optimism about the company’s medium- to long-term growth prospects.
[email protected] Bae Han-geul Reporter