Expanding NGP Products And Global Markets Will Drive Future Success

Key Takeaways

• Strategic global market focus and pricing in high-value regions are poised to drive revenue and profit growth through increased market penetration and volume.
  
• Shareholder-friendly policies, including share buybacks and divestitures, aim to boost earnings per share and enhance overall corporate value.
  
• Challenges in domestic markets, strategic realignment, and cost issues could impact KT&G's revenue growth and profitability across various business segments.

Catalysts

Engages in the production, distribution, and sale of tobacco products in South Korea, Europe, and internationally.

• KT&G's focus on global market penetration, particularly in the Global CC (Cigarette) business, is expected to drive future revenue growth and improve profitability. Strong volume growth and pricing strategy in high ASP (Average Selling Price) geographies could significantly enhance revenue and operating profit.
  
• The company's strategic adjustments in the NGP (Next Generation Products) business, including new product launches and market expansions, aim to maintain growth momentum, thereby potentially improving both revenue and profit margins over the next year.
  
• KT&G's shareholder-friendly policies, such as the cancellation of treasury shares and continued share buybacks, are expected to improve earnings per share (EPS) by reducing the number of shares outstanding, enhancing overall shareholder value.
  
• With guidance indicating a 5% to 7% increase in revenue and a 6% to 8% growth in operating profit for 2025, KT&G aims to strengthen its financial performance through strategic focus on core tobacco operations and prudent cost management.
  
• The emphasis on divesting non-core assets and utilizing funds for shareholder returns, including the KT&G Plus Alpha program, is likely to lead to improved capital allocation efficiency, supporting net margin growth and enhancing overall corporate value.

KT&G Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KT&G's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.8% today to 18.1% in 3 years time.
• Analysts expect earnings to reach ₩1211.7 billion (and earnings per share of ₩9881.23) by about May 2028, up from ₩1172.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩1523.0 billion in earnings, and the most bearish expecting ₩1033.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2028 earnings, up from 10.2x today. This future PE is greater than the current PE for the KR Tobacco industry at 10.1x.
• Analysts expect the number of shares outstanding to decline by 4.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

KT&G Future Earnings Per Share Growth

Risks

• The structural market decline in the domestic cigarette market, with total market volume reduced by 3.9% in 2024, poses a risk to revenue growth in this segment.
  
• Cost variances, including COGS and one-off expenses, led to lower profits in certain quarters, which could negatively impact net margins if not addressed.
  
• Despite record volumes, the weak performance in the Health Functional Food (HFF) segment, with a 6.6% decline in annual revenue due to subdued domestic markets, could drag down overall revenue and earnings.
  
• The real estate segment experienced a significant 34% decline in annual revenue due to strategic realignment, which has led to operating losses that could continue to affect net income.
  
• Ongoing internal and external uncertainties, including delayed economic recovery and weakened consumer purchasing power, present risks that could hamper revenue growth and profitability across KT&G's business segments.

Valuation

• The analysts have a consensus price target of ₩135187.5 for KT&G based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩150000.0, and the most bearish reporting a price target of just ₩117000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩6707.1 billion, earnings will come to ₩1211.7 billion, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of ₩114700.0, the analyst price target of ₩135187.5 is 15.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.