[Edaily Reporter Kim Hyung-il ] Meritz Securities has lowered its fair value estimate for LS(006260)from 640,000 won to 390,000 won. This adjustment reflects an increase in the discount rate applied to the value of its unlisted subsidiaries, a reduction in the valuations of comparable companies, and the decline in LS ELECTRIC’s stock price. However, since the current stock price is trading at a discount of more than 70% relative to its net asset value (NAV), the firm maintained its “Buy” investment rating.

On the 28th, Jang Jae-hyuk, an analyst at Meritz Securities, projected that LS’s third-quarter consolidated operating profit would reach 483 billion won, an 87.9% increase year-over-year. This represents an 18.9% decrease from the previous quarter and is expected to be in line with the market consensus of 488.5 billion won. While the earnings of LS ELECTRIC and LS Cable are better than expected, the firm analyzed that LSMnM will fall short of estimates due to exchange rate fluctuations and falling precious metal prices.

LS Cable’s third-quarter operating profit is estimated at 147.6 billion won, an 84% increase year-over-year and a 4.5% increase quarter-over-quarter. Despite a profit-sharing structure with GAONCABLE and the bus duct business, the operating profit margin (OPM) is projected to remain around 15%, driven by high-margin domestic orders, particularly from semiconductor companies. In the fourth quarter, the contribution of the subsea cable business is expected to expand as shipments to TenneT increase, and operating profit is projected to reach 167.9 billion won, a 13.7% increase from the previous quarter. The analysis suggests that, following the bus duct business—which drove this year’s earnings improvement—subsea cables, centered on the Donghae 4 and 5 projects, will become an additional growth driver starting in the fourth quarter.

In contrast, LSnM’s third-quarter operating profit is expected to be 49.2 billion won, a 72% decrease from the previous quarter. The report explains that falling exchange rates, declining precious metal prices, and a sharp drop in treatment charges (TC) weighed on earnings. In the fourth quarter, as the decline in metal prices moderates, operating profit is projected to rise 53.6% quarter-over-quarter to 75.6 billion won. However, this represents a 33% decrease compared to the same period last year.

The reason Meritz Securities significantly lowered its fair value estimate is a change in the valuation of the company’s unlisted subsidiaries. The discount rate applied to the net asset value (NAV) of unlisted companies was raised from 20% to 40%, while the price-to-earnings (P/E) ratio of LS Cable’s peer companies was lowered from 21x to 17x, and the price-to-book (P/B) ratio of LSMnM’s peer companies was reduced from 1.3x to 1.2x. The report also reflected the decline in LS ELECTRIC’s stock price.

Analyst Jang explained that more than half of the downward revision to the fair value stemmed from the widening of the NAV discount rate for unlisted companies. This assessment is based on the view that uncertainty regarding the allocation of growth businesses and investments among affiliates has increased. Previously, the focus was on growth centered around the unlisted LS Cable, but recently, the roles of listed grand subsidiaries—such as GAONCABLE, LS Eco Energy, and LS Marine Solution—have also been expanding. The analysis suggests that if the value attributable to LS shareholders is eroded during the allocation of growth businesses and investments, the valuation will need to be reassessed. Taking into account the ability to invest directly in listed subsidiaries, the relative appeal of indirect investment through LS was assessed more conservatively than before.

Uncertainties surrounding dual listings were also cited as a reason for widening the discount rate. Although discussions regarding Solidim’s listing have been put on hold for now, concerns have not been fully resolved, as it has been reaffirmed that dual listings of subsidiaries are possible under certain conditions. Given that the current system follows a “prohibition in principle, exceptions allowed” structure, we determined that expectations of a narrowing discount rate due to alleviated concerns over dual listings should be reflected with caution.

However, Meritz Securities noted that since LS’s current stock price is trading at a discount of over 70% relative to its NAV, the market appears to be overreacting to these concerns. The firm projects that, despite the conservative adjustment to the valuation, there remains upside potential, and the company’s value could be reevaluated once uncertainties regarding the allocation of growth initiatives and investments among affiliates are resolved.