2023 Forecast: OP to Grow 38% YoY
The author is an analyst of KB Securities. He can be reached at wchun@kbfg.com. -- Ed.
Initiating coverage with BUY, target price of KRW91,000
We initiate coverage on DL Holdings with a BUY rating and TP of KRW91,000 (55.3% upside). Our valuation of Refineries & Chemicals stocks is based on the ROE-P/B model given that (1) the industry is cyclical and has fully developed technologies, allowing for long-term ROA predictions, and (2) sensitivity to near-term economic changes puts stock performance in line with 12m fwd earnings. Our ROE-P/B-based TP (10.2% COE; 3.3% TGR) represents 5.6x 12m fwd implied P/E, 0.5x P/B.
3Q22E OP of KRW198.3bn above market consensus by 13.4%
We forecast 3Q22 OP at KRW198.3bn (+237 QoQ, +166% YoY), which is 13.4% above the market consensus of KRW174.9bn. Earnings growth should be largely attributable to full-quarter contributions from recently acquired Kraton (KRW96.7bn) and high-demand seasonality for DL Energy (KRW38.1bn). Even with the slowing economy weighing down on domestic/overseas chemical markets, we see DL Holdings benefiting from surges in gas/oil prices keeping petrochemical prices high (naphtha/ethane account for 90% of petrochemical industry’s feedstock). In response to high gas/oil prices, plastic-substitute manufacturers are raising prices, leading to margin improvements. We see DL Holdings continuing its earnings run, with 4Q22E OP at KRW151.7bn (-24% QoQ, +347% YoY).
2023 forecast: OP to grow 38% YoY; earnings growth to be in line with gas/oil prices
We forecast 2023 OP at KRW609.2bn (+38% YoY), with growth driven by full-year contributions from Kraton (KRW332.5bn). Chemicals is facing the worst market conditions in a decade as a supply glut coincides with contracting demand. Low-tier NCCs/ECCs are likely to lower their capacity utilization rates over the next 3-4 years to limit supply, and if gas/oil prices remain high, DL Holdings should continue to flourish.