American activist hedge fund White Box Advisors (hereinafter referred to as White Box) cited’shareholder value’ as the reason for opposing the division of LG Group. Whitebox pointed out that LG Group is having a negative impact on the stock price by taking a’owner’-centered management rather than a shareholder. Really?
In conclusion, the division of LG Group did not affect LG Corp.’s share price. LG Corp. held a board meeting on the 26th of last month and decided to separate its affiliates. On the same day, LG Corp.’s closing price recorded 7200 won, down 1,000 won from the previous day. LG Corp.’s closing price on the 14th was 7,100 won. The closing price on the 15th is 78,000 won. It means that LG Corp.’s share price has been maintained at the previous level until 20 days after the board decided to separate its affiliates.
LG’s stock price flow. (Source = Naver Finance)
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Looking at the stock price trend over the past year, the stock price is rather stable. On March 23rd, LG Corp.’s stock price recorded 44,600 won, the lowest point of the year. This was the 13th day of the World Health Organization’s (WHO) corona pandemic declaration. In the aftermath of Corona 19, the stock price remained low and recovered to the late 70,000 won level at the end of the year.
The business community predicted that the division of the LG Group would serve as a positive for LG Corp.’s share price. From before, the business community has determined that the division of the division, centered on LG Group advisor Koo Bon-jun, is’constant’. It was observed that the former adviser would become independent by taking over the group affiliates using LG Corp.’s shares. The former advisor owns 7.72% of LG Corp.
When the LG Group succeeded in managing the first-born son, the other brothers became independent and pioneered separate areas. An example is that the descendants of the LG founder’s younger brother, honorary chairman Koo Cheol-hoe, created LG Fire & Marine Insurance in 1999 to become independent from the group and then formed the LIG group. Currently, the LIG Group is growing mainly with defense affiliates such as LIG Nex1.
This observation was made a reality this year, and the former adviser decided to control four affiliates, including LG Hausys and Pantos, through the new holding of LG Corp. The division date is May 1 next year. As the group division became a reality, the’anxiety factor’ of the governance structure disappeared. The stock price also had no effect, as if foreseen.
Whitebox points out that there are some aspects that are right. Whitebox pointed out that “LG Group’s stock price is about 69% of its net asset value,” and pointed out that the stock price was undervalued because of LG Group’s family management. This is only half true.
The market analyzed that LG Group’s stock price has been undervalued since before. Jeong-daero, a researcher at Mirae Asset Daewoo, pointed out this in a report titled’How to use LG’s ample cash deposit’ in May. Researcher Jung explained that “LG’s valuation has been significantly undervalued historically.” It is explained that the stock price is not undervalued due to the division of the group.
Mirae Asset Daewoo’s LG market report released last May. (Source = Mirae Asset Daewoo Researcher Jeong-daero)
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According to the report, LG Corp.’s’discount rate to net asset value per share’ recorded 63%. This means that LG Corp.’s market capitalization is 63% of its net asset value (assets minus liabilities), which means that it is undervalued in the market.
In the case of holding companies, the market is assessed by adding up the value of their separate business units and subsidiaries. Through this, the company’s net asset value (assets minus liabilities) is calculated. However, the holding company is greatly affected by changes in the stock market as most of its assets are made up of stocks. Market fluctuations affect the stock price of subsidiaries and affect the holding company. Because of this, most of the domestic holding companies are undervalued.
Researcher Jung explained that LG Corp. was undervalued because it did not come up with a shareholder return policy. This year, LG Corp. has significantly increased its controlling shareholders’ net profit as its electronics and chemical affiliates performed excellently despite Corona 19. Last year, LG CNS and Serve One secured about KRW 2 trillion, and the Beijing Twin Tower (selling price of 1.4 trillion KRW) increased equity method gains this year.
On the other hand, there was no policy to return to shareholders such as dividend expansion and treasury stock purchase. LG Corp. has not acquired treasury shares since 2005. Market expectations for LG Corp. have risen, but the share price is undervalued as there is no policy to return to shareholders.
The cumulative net profit of controlling shareholders in the third quarter of this year was 1.451.7 trillion won. The net profit of controlling shareholders in the same period of the previous year was KRW 1.28.75 billion. In the third quarter of this year, the net profit of controlling shareholders increased by about 11.3% (1642 billion won) compared to the same period last year.
Net profit of controlling shareholder means the net profit corresponding to the share of shareholders of the parent company. With the introduction of the Korean International Accounting Standards (K-IFRS) in 2014, consolidated financial statements are prepared by adding up sales and operating profits of the parent company and subsidiaries. To distinguish this, the shares of controlling shareholders and those of non-controlling shareholders are divided and marked separately.
Financial status of LG Corp. cash equivalents, etc. (Source = Financial Supervisory Service)
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Of the net profit earned by the subsidiary until the third quarter of this year, it is KRW 1.451.7 trillion, calculated as the stake in LG. In the third quarter of this year, LG Corp.’s cash assets increased by 72% (391.7 billion won) to 5419 billion won, compared to the end of last year (150.2 billion won).
Researcher Jeong Dae-ro said, “The market has high expectations on how LG Corp. uses cash.” “If LG Corp. introduces an active shareholder return policy, the corporate value will be reevaluated. I am very interested in whether to use it for dividends or new business.”
A business official said, “The reason why the activist fund put a brake on the division of LG Group was because of the lack of a policy to return shareholder value.”
LG Corp. dividend payout ratio trend. (Source = Financial Supervisory Service)
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Meanwhile, LG Corp.’s dividend payout ratio was 35.8% last year. This is an increase of 17 percentage points compared to the previous year.
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