Kakao shares hit new low amid legal risk, weak Q3 earnings outlook

[Photo by Yonhap]

South Korea’s platform giant Kakao Corp. is mired in multiple whammies, sending its shares to plunge to a new low amid a dim outlook for its third-quarter earnings.

Kakao sparked public outrage in October last year when a fire broke out at its data center in Pangyo, Gyeonggi Province, which exposed vulnerabilities inherent in a society that is highly interconnected.

Other incidents followed, including the moral hazard of its executives, affecting its earnings and stock price.

Industry insiders noted that Kakao faces legal risk as the Seoul Southern District Prosecutor‘s Office on Thursday issued an arrest warrant for Bae Jae-hyun, Kakao’s chief investment officer at Kakao, for allegations over price manipulation involving the company’s acquisition of SM Entertainment Co.

Media reports also found that Ryu Young-joon, former chief executive of Kakao Pay, had been appointed as an outside advisor in November last year, shortly after the controversial fire incident.

Ryu was initially named as the new co-CEO of Kakao in November 2021. However, in December of the same year, controversy sparked when Ryu and other Kakao Pay executives executed a block deal, selling Kakao Pay shares worth 90 billion won ($66.3 million) to earn approximately 46.9 billion won in cash.

The transaction occurred roughly a month after Kakao Pay’s listing. The controversy caused Ryu to resign from his position in January of 2022.

The former Kakao CEO, Namgung Hun also gained 9.43 billion won in profits by exercising his stock options.

Kim Beom-su, the company’s founder, is also not free from the legal risks.

Last month, a civil group filed a complaint with the Seoul Southern District Prosecutor’s Office against Kim and executives of Kakao’s blockchain platform, Klaytn, accusing them of embezzlement.

Kakao also faces political pressure.

Kakao’s mobility subsidiary, Kakao Mobility Corp., came under scrutiny for alleged technology theft from small and medium-sized enterprises before its foray into the freight brokerage market., Kakao’s major challenges also lie in its financial performance and share price, as the acquisition of SM Entertainment incurred higher costs than expected, raising uncertainty regarding new business ventures and substantial investments.

Kakao posted 71.1 billion won in operating profit in the first quarter, less than half of the same period a year ago. In the second quarter, operating profit plummeted 33.7 percent to 113.5 billion won.

According to a brokerage consensus compiled by Yonhap Infomax, Kakao is projected to post 134.2 billion won in operating profit in the third quarter, down 10.7 percent from the same period a year ago.

Brokerages are now revising down Kakao’s target stock price.

Samsung Securities Co projected Kakao’s operating profit to plunge 16.8 percent to 122.3 billion won in the third quarter from a year ago. It lowered its stock price target from 62,000 won to 54,000 won.

Hyundai Motor Securities Co. also revised down the target to 72,000 won from 80,000 won.

Shares of Kakao had reached as high as 173,000 won during the day in June 2021 but they fell to a new low of 40,600 won on October 6.

Shares of Kakao closed at 41,800 won on Wednesday.