Target Price Lowered from W50,000 to W48,000
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Impacted by cost burden, Hyundai E&C’s 4Q22 OP is expected to miss consensus. However, in 2023, the overseas business is forecast to expand, centering on the Saudi Arabia NEOM project and NPP projects in Eastern Europe and the Middle East.
Bearish factors common to all Korean construction companies cannot be avoided
We maintain a Buy rating on Hyundai E&C but lower our TP from W50,000 to W48,000. Although it is difficult to avoid cost ratio increase due to the real estate market deterioration from 2H22, which has affected all peer companies, Hyundai E&C should be able to partially offset such negatives through the Saudi Arabia NEOM project and nuclear power plant (NPP) projects in Eastern Europe and the Middle East. Our downward TP revision is attributable to the reflection of over-the-counter price drop for Hyundai Engineering.
Construction companies are expected to be conservative in calculating their 2023 apartment pre-sales targets, reflecting deteriorating real estate market conditions and sluggish 2022 pre-sales performances. In 2023, with construction materials and labor costs to continue to rise, cost ratio is expected to worsen at the housing division.
However, Hyundai E&C is expected to be able to compensate for the sluggishness of the domestic housing division with overseas projects. Given strengthened cooperation with KEPCO and Westinghouse, NPP projects, which are increasing mainly in Eastern Europe and the Middle East, should be at the center of Hyundai E&C’s overseas orders, along with the Saudi Arabia NEOM project. We note that the UAE Barakah NPP project is estimated to have outperformed other civil engineering and plant projects in all aspects, including new order amount and profitability.
4Q22 preview: Similar with other construction companies
On a consolidated basis, Hyundai E&C is forecast to report 4Q22 sales of W5.2tn (-0.3% y-y) and OP of W164bn (-26% y-y), with both figures to miss consensus, affected by labor and material cost hikes, following 3Q22. As Hyundai E&C has experience in increasing the contract amount for housing construction through contract changes with developers, the impacts of cost issues should be minimal. However, as costs continue to rise and the real estate market continues to deteriorate, it is expected that the earnings trend at Hyundai E&C will eventually prove similar to that at other construction companies.