Proactive in Hydrogen Industry’s Development
The author is an analyst of KB Securities. He can be reached at moonjoon.chang@kbfg.com. -- Ed.
Maintain BUY, raise target price to KRW30,000
We maintain BUY on Samsung Engineering but raise our TP by 7.1% to KRW30,000 (2.0x 12m fwd P/B) despite an increase in COE (9.0%→9.5%) due to a raised RFR. Our new TP reflects (1) an increase in ROE (15.0%→16.0%), in line with upward revisions to earnings estimates, and (2) an increase in 12m BVPS (KRW13,807→KRW14,679) following a change in valuation period.
Order backlog growth could lag plant market recovery
Despite the KOSPI slump, Samsung Engineering has outperformed the market’s 3m return by over 12pp. Expectations for plant market improvement and order growth are helping lift the stock’s bottom, which had already rose on a stable uptrend in returns. We note that the company trades closely with order backlog trend. Given a high 2022E-23E revenue base (avg. of KRW9.4tn), backlog growth relative to plant market recovery could lag historical trends when both order placements and order backlogs improve in tandem.
Eco-friendly plants expected to drive structural re-rating
We believe Samsung Engineering’s growth in the eco-friendly plant market will serve as the key stock catalyst rather than improvements in orders and traditional markets. (1) Although the company had been slow in securing source technologies in the chemical engineering area, it should hold advantages in source technologies and project development in the eco-friendly plant market (vs. overseas EPCs) thanks to its differentiated financial structure. (2) Given such advantages, Samsung Engineering should be able to diversify its key businesses into three segments (i.e., non-chemical, chemical, eco-friendly plants) from the current two (i.e., non-chemical operated by affiliates, chemical in a highly competitive market). Eventually, the company is expected to be re-rated on a paradigm shift, moving away from the traditional valuation framework focused on order backlogs.
Proactive in hydrogen industry’s development
Amid the hydrogen industry’s accelerating development, plants for carbon capture, ammonia and water electrolysis are likely to expand in pursuit of economies of scale. Samsung Engineering stands out in the global market, as it has been proactively working in various areas (e.g., project development, partnerships with companies with related technologies) rather than waiting for the market to mature.