Construction Industry Conditions Remain Lackluster
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
GS E&C’s 4Q22 OP likely fell short of consensus due to one-off labor costs and materials price hikes. Full year OP in 2023 is projected to slide 15% y-y to W472.5bn due to deteriorating real estate market conditions and additional cost burden.
Construction industry conditions remain lackluster
We maintain a Hold rating on GS E&C and lower our TP from W27,000 to W25,000. We maintain a Hold rating as: 1) the real estate market deterioration that began in 2H22 is expected to continue in 2023, and 2) materials costs (including for rebar and cement) and labor costs remain burdensome. The downward revision to our TP is attributable to a 13% cut to the 12-month moving average EBITDA applied to the construction division.
The real estate market deteriorated sharply in 2H22, overlapping with steep interest rate hikes. The apartment sales price index and jeonse price index continue to decrease due to falling demand for apartments and interest rate burden. Also, the apartment pre-sales market is deteriorating, with unsold units rising to 60,000 in December. For 2023, construction firms have announced conservative pre-sale plans, reflecting the difficult real estate market conditions and poor pre-sales performance in 2022. We expect housing division sales to decline over the mid/long term. Rebar and cement prices remain high, reflecting rising costs, and labor costs are also burdensome. The firm’s cost ratio will inevitably rise y-y in 2023.
4Q22 OP to fall short of consensus, but competitiveness remains
We expect GS E&C to book consolidated 4Q22 sales of W2.9tn (+12% y-y) and OP of W106.5bn (-45% y-y), missing consensus on the reflection of rising labor and materials costs. However, the company confirmed its housing division strength by selling 28,000 units in 2022 and achieving its goal despite the difficult real estate market conditions. If the government actively promotes redevelopment/reconstruction policy measures, the firm should show differentiated earnings performance.