3Q22 OP in Positive Territory
The author is an analyst of KB Securities. He can be reached at newday@kbfg.com. -- Ed.
Revise down TP to KRW90,000; Maintain BUY
We lower our 12m TP for KSOE by 10% from KRW100,000 to KRW90,000 (target P/B multiple of 0.64x applied to 12m fwd BVPS) as we reflect changes to ROE (i.e., decline in new orders for 2023), total equity (i.e., earnings estimate revisions and a change to the 12m fwd base period), as well as risk-free and terminal growth rates (i.e., rise in market interest rates). We maintain BUY, however, as our revised TP offers 25.7% potential upside given recent share-price decline.
3Q22 OP in positive territory, after three consecutive quarters of operating losses
KSOE posted 3Q22 K-IFRS consolidated revenue of KRW4.26tn (+19.9% YoY) and OP of KRW188.8bn (33.2% YoY; 4.4% OPM). Revenue missed consensus by 7.0%, but OP beat by a wide margin. By subsidiary, OP for Hyundai Heavy Industries (HHI) came in at KRW15.3bn, Hyundai Mipo Dockyard (HMD) KRW14.0bn, and Hyundai Samho Heavy Industries (HSH) KRW150.6bn. OP for listed firms HHI and HMD were in line with the consensus.
Slightly in negative territory, however, when stripping out non-recurring factors
3Q22 consolidated OP includes non-recurring profits of KRW216.6bn—i.e., KRW98.7bn from increased KRW/USD rates (KRW34.0bn from HHI, KRW25.6bn from HMD, KRW39.1bn from HSH), KRW32.1bn in reversal of liquidated damages for delayed deliveries of specialized vessels at HHI, and KRW85.8bn from higher vessel prices following LNG vessel contract renewal at HSH. Stripping these out would result in adjusted OP of -KRW27.8bn. Also at the non-operating level, FX translation gains of over KRW200.0bn was reflected, bringing total FX-related gains on an EBT basis to around KRW300.0bn.
3Q22 results a bit disappointing, but earnings improvement expected to continue
Though the numbers indicated an earnings surprise, we find KSOE’s 3Q22 results to be slightly disappointing from a qualitative perspective; however, earnings improvement should continue every quarter going forward. 3Q22 cumulative shipbuilding/offshore new orders came in at USD20.3bn (USD8.83bn at HHI, USD7.87bn at HSH, USD3.6bn at HMD), exceeding annual order guidance of USD17.5bn. Although impact from low-priced orders won prior to 1H21 should persist through 1H23, large-scale orders received in times where both ship prices and FX rates were on an uptrend should lead to full-blown profitability improvements from 2H23 onwards.