Potential for M&A Activity Deserves Attention
The author is an analyst of KB Securities. He can be reached at newday@kbfg.com. -- Ed.
Maintain BUY, target price of KRW90,000
We maintain our 12m TP of KRW90,000 (12m fwd BVPS x 0.63x target P/B) on KSOE, as earnings estimate revisions (reflecting 3Q22 earnings, changes in assets/debt) offset changes in RFR, TGR and beta. We maintain BUY, as our TP offers 23.0% upside despite the recent rally.
Grossly undervalued at 0.51x 2023E P/B even with holding company discount
KSOE is grossly undervalued at 0.51x 2023E P/B (vs. Hyundai Heavy Industries at 1.54x, Hyundai Samho Heavy Industries at 1.42x), even when considering the discount applied for being a holding company with its own businesses that account for an insignificant portion of earnings. Its valuation gap with other shipbuilders may narrow, as its key subsidiaries may resume dividend payouts after returning to profitability.
HSHI IPO to increase trading dynamics for stock
In 2023, we expect KSOE to conduct an IPO for Hyundai Samho Heavy Industries—a shipbuilding subsidiary specializing in large ships (e.g., LNG carriers, containerships)—in accordance with an agreement with financial investors. Similar to the Hyundai Heavy Industries IPO, we expect trading of KSOE stock to grow between the beginning and end of the IPO process.
Potential for M&A activity deserves attention
As of end-September, KSOE’s net cash (standalone) stood at KRW1.3tn (cash & cash equivalents at KRW1.6tn, debt at KRW0.3tn). HHI Group has been trying to strengthen its business capabilities and pioneer new business ventures. With the economic slowdown likely to induce an influx of solid companies into the M&A market, the stock should benefit if KSOE uses its large cash reserves to acquire a promising company.