3Q22 Forecast: OP of KRW65.9bn (-6.6% YoY)
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Maintain BUY; lower target price 18.8% to KRW13,000
We maintain BUY on Hanon Systems but lower our TP by 18.8% to KRW13,000. We cut 2022E/2023E OP by 40.4%/5.0% to reflect delays in production normalization at automakers (excl. Hyundai Motor Group). Also, we raise WACC (6.9%→8.3%) to reflect rising interest rates. Our DCF-based TP (8.3% WACC; 1.0% TGR) implies 21.7x 12m fwd P/E, 2.79x P/B and has 37.0% upside (vs. Sep 28 close).
3Q22 forecast: OP of KRW65.9bn (-6.6% YoY) below market consensus by 23.3%
We forecast 3Q22 OP at KRW65.9bn (-6.6% YoY, +9.7% QoQ), which is below the market consensus by 23.3% and lower than our previous estimate by 34.9%. Despite falling feedstock prices since 2Q22, feedstock costs should remain flat QoQ at 67.3% of revenue (vs. 67.4% in 2Q22). We note that the increase in KRW/USD is reflected in feedstock prices but not revenue (i.e., hedging). As such, we estimate 3Q22 EBITDA margin and OPM to remain flat QoQ at 9.4% and 3.0%, respectively.
Operating leverage likely to be favorable as utilization improves
We anticipate operating leverage will firm going forward. Revenue should ramp up at non-HMG clients (e.g., Volkswagen) as supply chains affected by the Russian-Ukraine war normalize and chip shortages fade. Of note, the global automobile market as of July contracted 9.2%, or 12.5% excl. China. Fixed costs should decline as utilization for electronic compressors improve (currently at 60%). Also, lower transportation costs should contribute to earnings improvement.
Risk factors: Demand erosion, cost hikes, slower European production
Risk factors include (1) the possibility of demand eroding with growing global economic uncertainty, (2) cost increases amid prolonged inflationary pressure and (3) production at European clients slowing amid the energy crisis.