Brief Korea: Samsung Elec C/1P Trade: 1P Still Overpriced Even with Year-End Dividend and more

In this briefing:

  1. Samsung Elec C/1P Trade: 1P Still Overpriced Even with Year-End Dividend
  2. BNK Financial: Too Cheap for a Reason
  3. Japan Tobacco Selling 2.1% Stake of KT&G in a Block Deal
  4. Korea – Massive Covering on Hyundai Motor, Shorts Increase on SK Companies
  5. KT&G Corp Placement – Unlike to Make or Lose Much

1. Samsung Elec C/1P Trade: 1P Still Overpriced Even with Year-End Dividend

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Samsung Elec is again giving an entry point for a share class trade as the pair is at a -1.6σ on a 20D MA. The C/1P price ratio is also below the 120D mean and the 1Y mean. The 1P discount to its underlying share is 17.6%, which suggests that 1P is in an overvalued territory relative to the common.

2. BNK Financial: Too Cheap for a Reason

At Q319,Bnk Financial Group (138930 KS)  reported a PH Score™ of 9.2 revealing benign trends in core indicators such as Profitability, Liquidity, Asset Quality, Capitalisation, and Provisioning. The valuation variable in the PH Score™ contributed to a high rating. We are though mindful of inefficiencies in particular, materialised in the “CIR excluding trading” and the “core jaws” position. Mid single-digit OPEX growth (including compensation costs) strikes us inappropriately high vis-à-vis reduced top-line performance. Earnings Quality could be better too which means that the Profitability trends may be flattering. However, the Asset Quality position is broadly moving in the right direction despite a delinquency spike at Kyongnam. We mainly recommend that management takes more stringent action on inefficiencies at both Busan and Kyongnam. There is ample scope.

BNK trades at a P/B, FV, and Earnings Yield of 0.3x, 3%, and 19.9%. Dividend Yield fetches 4.2%.

On balance, we recommend BNK shares. The valuation seems just too cheap given the stolid – if not rather undynamic- profile. Asset Quality improvement (not always the case in Asia to say the least) partly offsets risks and weaknesses which emanate from the growth of Funding costs, inefficiencies, Earnings Quality and sizeable real estate exposures. If shares traded at a FV of 6% and a P/B of 0.6x our recommendation would be different. Quite simply, despite aforementioned risks and headwinds, the asset is priced in the top quintile globally for value with little good news or potential, priced-in. There is a price for everything.

The South Korean banking sector has been described as many things. However, we believe that the sector is relatively quite stable while valuations and income compensation in the form of reasonable yields are supportive. The market remains a value space -not seemingly a natural for growth-oriented investors- without succumbing yet to the “cheap” and risky Japanese imbroglio.

BNK’s share price has performed relatively well of late, moving into -and post- the Q3 release.

The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was backtested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 

3. Japan Tobacco Selling 2.1% Stake of KT&G in a Block Deal

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It was announced after the market close today that Japan Tobacco plans to sell its 2.1% stake in KT&G Corporation (033780 KS) (2.86 million shares). The block deal discount is 2.0% to 3.5% discount to the closing price today (97,200 won), which would range from 93,800 won to 95,250 won. KT&G’s DPS is 4,000 won right now so the dividend yield is 4.1%.

We believe that this block deal is a good one for investors seeking 6-8% returns over the next 3-6 months. However, we would not recommend this block deal for investors that are seeking at least double digit returns.

One of the key reasons why Japan Tobacco is selling its stake in KT&G is to improve its balance sheet.

Another reason why Japan Tobacco may be selling its stake in KT&G is because of the terrible political relationship between Japan and South Korea in the past five months.

4. Korea – Massive Covering on Hyundai Motor, Shorts Increase on SK Companies

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The Korea Exchange (KRX) publishes outstanding short position data daily with a two day lag. The data below is of the close of 29 November.

5. KT&G Corp Placement – Unlike to Make or Lose Much

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Japan Tobacco (2914 JP) plans to raise around US$230m via selling down its 2.0% stake in KT&G Corporation (033780 KS).

From what I can gather, JT has been a long term shareholder for KT&G but it doesn’t seem to have any strategic say in the company. Thus, the selldown might not carry a lot of negative connotations.

At the same time, the stock price performance of KT&G hasn’t exactly been very exciting and the discount as well isn’t highly appealing either.

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