Naver Reports Strong Revenue Again, but Weak Operating Profit; FVE Cut to KRW 240,000

Naver reported broadly in-line third-quarter 2022 revenue with 19% year-on-year growth, but operating profit was down 5.6%, which was below our expectations. The key search platform business, which underpins Naver’s narrow moat based on intangible assets and network effect, reported revenue growth of 8% year on year in the third quarter, which is a slowdown on recent quarters, but better than its key global peer Google. Given lower-than-expected third-quarter profits and weakening economic outlook we reduced our margin forecasts and underlying profit forecasts by around 20% in 2022 and 2023. We also incorporated the USD 1.2 billion acquisition of Postmark from 2023 onward, which further reduced earnings in 2023 by 9% with that impact breaking even in 2026. Added to this, our fair value estimate for Z Holdings has been cut to JPY 440 from JPY 600. All in all, our fair value estimate for Naver falls to KRW 240,000 per share from KRW 311,000 per share previously. The stock is down around 60% from its peak in September 2021, which is slightly better than peers Kakao and Coupang and we see it as slightly undervalued at these levels, although we see few near-term share price catalysts. The company announced a special dividend of KRW 137.1 billion, or around KRW 940 per share, in line with its shareholder return policy to return 30% of the last two-year average consolidated free cash flow defined as consolidated operating income plus noncash expenses minus capital expenditures minus taxes paid.