[Edaily Reporter Shin Ha-yeon ] On the 14th, HYUNDAI MOTOR SECURITIES projected that LotteChilsungBeverage(005300)would continue to face cost pressures due to rising raw material prices, despite beverage price hikes and growth in its flagship products. Reflecting this outlook, the firm lowered its earnings estimates and valuation, reducing the target price by 17.6% from 170,000 won to 140,000 won. It maintained its “Buy” rating.

Ha Hee-ji, an analyst at HYUNDAI MOTOR SECURITIES, stated, “We expect to see the effects of July’s beverage price hikes and sales growth centered on flagship products such as zero-calorie carbonated drinks, energy drinks, ‘Sae-ro,’ and RTDs,” but added, “From a profitability perspective, challenges remain.”

LotteChilsungBeverage’s second-quarter consolidated revenue rose 2.4% year-over-year to 1.1129 trillion won, while operating profit fell 10.5% to 55.8 billion won. The operating profit margin stood at 5.0%, falling short of market expectations due to increased costs stemming from geopolitical factors in the Middle East.

By business segment, beverage sales rose 1.7% year-over-year, but operating profit fell 13.5%. Despite the downward trend in the traditional retail (TT) channel, zero-calorie carbonated drinks and energy drinks drove growth; however, soaring prices for packaging materials such as cans (CAN) and PET bottles, along with rising oil prices, dragged down profitability.

The alcoholic beverages segment performed relatively well. Revenue increased by 3.2% year-over-year, and operating profit surged by 158.6%. Amid a still-challenging market environment for alcoholic beverages, new soju and RTD products posted strong growth, and profitability improved due to an optimized product mix.

Analyst Ha explained, “While the overall liquor market remains challenging, the high growth of new soju and RTD products is encouraging, though it is somewhat disappointing that beer sales remain sluggish,” adding, “Profitability improved thanks to the effects of an optimized product mix.”

In the global business, profitability deteriorated despite revenue growth. Revenue increased by 3.4%, driven primarily by Pakistan, but operating profit fell by 27.0%.

Analyst Ha pointed out, “While revenue grew mainly in Pakistan, profitability declined as the company was significantly impacted by the short-term fallout from the Middle East.”

The trend of revenue growth coupled with a decline in profits is expected to continue in the third quarter. HYUNDAI MOTOR SECURITIES estimated LotteChilsungBeverage’s third-quarter revenue at 1.1175 trillion won, up 3.6% year-over-year, and operating profit at 86 billion won, down 6.3%. The projected operating profit margin is 7.7%.

The effect of price increases was cited as a factor supporting performance in the second half of the year. LotteChilsungBeverage raised beverage prices last July and is expected to continue sales growth, led by its flagship products such as zero-calorie carbonated drinks, energy drinks, “Saero,” and RTDs.

However, since can and PET bottle prices are expected to remain high in the second half of the year, the cost burden is expected to persist for the time being.

Analyst Ha explained, “Prices for key raw materials—cans and PET bottles—are expected to remain high in the second half of the year,” adding, “The company is presenting a strategy to defend profitability through price hikes, reductions in fixed costs, and improvements in product mix.”

Accordingly, LotteChilsungBeverage maintained its existing guidance for this year of 4.1 trillion won in revenue and 200 billion won in operating profit. These figures represent year-over-year increases of 3.2% and 19.6%, respectively. HYUNDAI MOTOR SECURITIES also projected this year’s revenue at 4.1177 trillion won and operating profit at 199.9 billion won.

HYUNDAI MOTOR SECURITIES lowered its earnings per share (EPS) forecast for LotteChilsungBeverage this year by 21.5%, from 12,967 won to 10,180 won. It also lowered its EPS estimate for next year by 23.2%, from 14,843 won to 11,397 won.

The firm also lowered the valuation metrics used to calculate the target price. By reducing the EV/EBITDA multiple—applied to 12-month forward EBITDA of 462.7 billion won—from 5.3x to 4.6x, it lowered the target price to 140,000 won.

Analyst Ha predicted that, given the lingering uncertainty regarding costs, the ability to defend profitability through price increases, reductions in fixed costs, and improvements in the product mix will be the key determinants of future earnings.