Flashlight Capital Partners nudges KT&G to spin off ginseng business

KT&G's building in Samseong-dong, southern Seoul. [YONHAP]

Flashlight Capital Partners, a private equity fund based in Singapore, is recommending KT&G spin off its ginseng business to recover from falling corporate value.

"Over the past six months we have had private discussions with the leadership to share our recommendations, including a corporate spinoff of the ginseng business Korea Ginseng Corporation [KGC], that we believe can unlock 100 percent share price upside over the next 12 months and fivefold over the next five years," Flashlight Capital Partners wrote in an English letter sent to KT&G's board of directors, which was also released on its website on Wednesday.

The private equity fund added that KT&G currently trades at a 50 percent discounted price compared to the intrinsic value of its assets.

KT&G traded at 93,600 won ($65.40) per share on Thursday, up 0.86 percent compared to the previous day. The company has been trading around the 80,000-won mark since Feb. 18, 2020, breaking 90,000-won for the first time on Wednesday.

Flashlight Capital Partners owns around 3 percent of KT&G. The largest shareholder of the company is National Pension Service with 7.55 percent.

Regarding the suggested spinoff, KT&G said it will "take careful consideration" and "maintain close relationships with its shareholders."

Flashlight Capital Partners also stressed that KT&G running its tobacco business alongside its health supplement ginseng business is contradictory and may have reduced possible investments or corporate value.

"By separating the ginseng business from the tobacco business, it is our view that KGC will get its fair valuation from the market and can more than quadruple its Ebitda over the next five years," read the private equity firm's letter. Ebitda stands for earnings before interest, taxes, depreciation and amortization.

KGC reported a net profit of 5.5 billion won in the second quarter, down 14 percent on year. Its revenue fell 5 percent on year to 246.4 billion won.

Apart from the spinoff plan, the private equity also urged KT&G to focus on enhancing exports of Lil, its heat-not-burn cigarette. The company currently exports Lil to 30 countries around the world, but does so through a product supply contract signed with Philip Morris International, another e-cigarette manufacturer.

BY LEE TAE-HEE [lee.taehee2@joongang.co.kr]