WF - Woori Financial: Outlook Is Mixed

2023-10-17 11:13:32 ET

Summary

• Korea Deposit Insurance Corporation is no longer expected to be a shareholder of Woori Financial by end-2024, and this is a favorable development for WF.
• On the flip side, WF's 2H 2023 financial prospects are poor, which could potentially be a drag on the stock's price performance in the short term.
• A Hold rating for WF is retained on the basis that the share price outlook is mixed.

Elevator Pitch

I continue to rate Woori Financial Group (WF) [316140:KS] stock as a Hold. I previously assessed Woori Financial's attractiveness as a potential investment candidate from a dividend investor's perspective in my August 8, 2023, update .

For this current write-up, my analysis leads me to the conclusion that the stock price outlook for Woori Financial is mixed, which translates into a Hold rating for the stock. WF's acquisition of the 1.2% equity interest that Korea Deposit Insurance Corporation has in the company is a positive development. But Woori Financial is expected to deliver negative YoY earnings growth for the second half of this year, which will limit the stock's upside potential in the very near term.

KDIC Stake Acquisition Could Be A Potential Re-Rating Catalyst

Woori Financial's stock price performance has been lackluster and its valuations are depressed. A recently proposed corporate action might be the catalyst needed to bring about a positive re-rating of WF's share price and valuations.

Year-to-date in 2023, WF's shares rose by +4.1% , which represents a significant underperformance as compared to the S&P 500 which went up by +14.4% in the same time frame.

The market currently values Woori Financial at a historical trailing price-to-tangible book value or P/TBV multiple of 0.35 times and a consensus forward next twelve months' normalized P/E ratio of 3.3 times as per S&P Capital IQ's consensus data. In comparison, WF's all-time historical mean P/TBV and P/E metrics were higher at 0.46 times and 5.4 times, respectively.

The sell-side's consensus mean and median price targets for Woori Financial were cut by -13% and -8% (source: S&P Capital IQ ), respectively since the beginning of this year. This indicates that the analysts have been revising their estimates of WF's intrinsic value downward.

One of the main factors contributing to WF's undemanding valuations and unexciting stock price performance is concerns about the 1.2% equity stake in the listed company held by the state-owned Korea Deposit Insurance Corporation or KDIC. Investors always had worries that KDIC would either influence Woori Financial's policies and strategies, or seek to sell down the company's shares in the open market. Although the 1.2% stake in WF seems rather small, KDIC is perceived to have significant influence over its investees by virtue of being a state-owned enterprise.

On October 5, 2023, Woori Financial issued a 6-K filing revealing that it "entered into a basic stock transfer agreement pertaining to the transfer of the remaining 9,357,960 shares (equity ratio of approximately 1.2%) held by KDIC in Woori Financial Group" with an "implementation deadline of December 31, 2024." In other words, WF will buy out KDIC's entire stake in the company by the end of 2024 at the latest.

This implies that there won't be any selling pressure on WF's shares resulting from KDIC disposing of its shares in the open market, which was one of the investors' key fears. More importantly, Woori Financial is expected to have greater discretion in setting its own corporate policies going forward, as KDIC will no longer be a shareholder of the company in time to come. As an example of a potential change, WF might be more willing to distribute a bigger proportion of its earnings and excess capital to shareholders in the form of dividends or share repurchases in the future.

Potential Stock Price Appreciation Might Be Capped By Poor Financial Prospects

Woori Financial's share price jumped by +3.9% on October 6, 2023, a day after the announcement of the proposed KDIC stake acquisition was released. This suggests that the market has a favorable view of WF's recent corporate move, and the chances of further capital appreciation for Woori Financial's shares have increased meaningfully.

However, WF's weak financial outlook suggests that there will be a ceiling for the company's potential share price appreciation.

Net profit for Woori Financial declined by -13% YoY from KRW1,762 billion in the first half of last year to KRW1,539 billion for the first half of the current year. WF's actual interim 1H 2023 earnings turned out to be -13% lower than the market's consensus bottom line projection of KRW1,775 billion (source: S&P Capital IQ ).

Looking forward, the market sees WF's normalized EPS contracting by -16.3% YoY and -21.4% YoY for Q3 2023 and Q4 2023, respectively in local currency or KRW terms.

Lower net interest margin and slower growth for non-banking businesses are expected to have hurt Woori Financial's financial performance for the second half of this year. At the company's most recent Q2 results call (event transcript sourced from S&P Capital IQ ), WF mentioned that "NIM (Net Interest Margin) is on a downward trend", and highlighted it is expecting "lower growth" on the "non-bank side."

Woori Financial's deposit funding cost will increase as the company competes with other Korean financial institutions for deposits, which will be a key factor driving down WF's future net interest margin. On the other hand, WF's key non-banking businesses such as investment banking and credit cards are likely to be negatively impacted by a weak economic environment.

Concluding Thoughts

I maintain my Hold rating for Woori Financial's stock. Based on my analysis, there are both positive (KDIC stake purchase) and negative factors (2H 2023 financial prospects) influencing WF's share price performance in the short term.

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