Description

Korea Ratings (KR) is a Korean listed subsidiary of Fitch that seems quite inexpensive.  The growth of their credit database subsidiary (separately listed E-Credible) provides potential upside that appears under-appreciated.  It’s worth noting upfront – liquidity is an issue.

E-Credible (~2/3 owned by KR) provides a credit database where firms can monitor the financial condition of current or potential suppliers. To use construction as a relevant example, general contractors can examine the strength of sub-contractors to make sure they’re partnering with reliable firms.  The service is free for “buyers” (large firms), where rapid adoption meant “sellers” had a huge incentive to participate (and pay for database inclusion). This two-sided network enables user growth and pricing power. During the first 9 months of 19’ E-Credible grew revenue in its core business ~12% (with ~40% pretax margins), continuing a history of impressive growth.

E-Credible - Revenue & Operating Income

The Korean rating agency industry has grown cyclically over time.  With revenues directly linked to issuance volume, KR effectively acts as a toll on growing capital markets activity. With no material capital invested in the business, growth is entirely accretive to shareholders.  Korean agencies charge below western rates despite 2 of the 3 relevant firms being controlled by Fitch & Moody’s, and any industry pricing increase would have excellent implications for agency profitability while not meaningfully impacting issuers’ cost of debt.  

Both businesses (Ratings & E-Credible) have excellent qualitative aspects with high operating margins, good historical growth and extraordinary returns on invested capital.  KR does not seem priced to reflect that, and trades at an enormous discount to the most applicable comps.

KR’s ~2/3 E-Credible stake is worth ~152b at market (~59% of MC), while KR’s net cash is ~68b (~26% of MC).  The implied price for the ratings agency is then ~40b, or ~3x pre-tax earnings. 

Consolidating the proportionate earnings and cash of E-Credible, KR trades at about ~8.5x LTM earnings net of cash.  Since growth is fully accretive (no meaningful capital requirements for either business) any expectation of MSD or HSD earnings growth may produce a nice long-term investment result.

Considering the consistent 65% payout ratio I’d expect the current dividend yield to be almost ~5%, which isn’t terrible. 

These are not astounding multiples for Korea, but as a Fitch listed subsidiary with a consistent ~2/3 payout ratio I don’t think this deserves a large Korean discount.  

Perhaps a fair valuation might be in the vicinity of: ~18x LTM earnings plus cash for E-Credible, 13x pretax for ratings, plus corporate cash.  If that were appropriate the business might currently be a growing ~60 cent dollar. Pick a couple reasonable comps and you’ll see those multiples aren’t aggressive (look where Moody’s trades), although I’ll admit that for a small-cap Korean equity it may be asking a lot. 

Risks might include a slowdown in the Korean economy/capital markets, any change in the financial regulatory structure of Korea (ratings often legally required), a degradation of the network effect in E-Credible, Fitch changing its governance policies, bad stuff in South Korea, etc.

Disclosure:

Have ownership interest in Korea Ratings Co., Ltd. at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of Korea Ratings Co., Ltd. without notice for any reason at any time.

Catalyst

TBD