Korea Zinc
The author is an analyst of Shinhan Securities. He can be reached at krpark@shinhan.com -- Ed.
1Q OP likely short at consolidated KRW155bn, standalone KRW163bn
We now expect Korea Zinc to report operating profit of KRW154.6bn (+46.6% QoQ) on a consolidated basis and KRW162.8bn (+4.2% QoQ) on a standalone basis for 1Q23, coming in short of consensus estimates of KRW165.7bn and KRW209.3bn, respectively. Standalone earnings should disappoint with the parent's lead sales volume falling by an estimated 87,000 tons (-13.4% YoY, -30.5% QoQ) from a month-long slowdown in capacity utilization rates due to maintenance work carried out on production lines.
Meanwhile, we believe consolidated operating profit remained under standalone operating profit in 1Q23, with sluggish performance of the Australian subsidiary Sun Metals Corporation continuing since 3Q22. However, the gap between consolidated and standalone profit should have narrowed significantly with electricity tariff cuts in Australia leading to partial recovery of capacity utilization rates and a subsequent decline in operating loss at the Australian subsidiary (operating margin: -28.2% in 3Q22, -17.6% in 4Q22, -5.4% in 1Q23F).
2Q outlook: Both consolidated & standalone OP to meet expectations For 2Q23, consolidated operating profit is projected at KRW212.3bn (+37.3% QoQ, -44.3% YoY) and standalone operating profit at KRW212.9bn (+30.8% QoQ, -38.8% YoY), both in line with current market consensus (consolidated KRW199.2bn, standalone KRW222.5bn). Metal prices are expected to remain similar to 1Q23, but sales volume should expand on a QoQ basis. The hike in zinc benchmark treatment charge for 2023 (USD274/ton, +19.1% YoY) will help to raise operating profit above 1Q23 levels. The Australian subsidiary is likely to remain in the red due to new plant commissioning issues, but we expect operating loss to narrow on a QoQ basis in 2Q23.
Retain BUY for a revised-down target price of KRW620,000
We lower our target price for Korea Zinc from KRW630,000 to KRW620,000 in reflection of revised earnings forecasts. Sharply contrasting with its past track record of steady earnings unaffected by macro conditions, Korea Zinc's recent volatile earnings are causing shares to trade at lower valuations. We believe it will take time for shares to regain the valuation premium enjoyed in the past. Nevertheless, our rating remains unchanged at BUY with new businesses to start generating sales in earnest from end-2023 and shares now trading at attractive valuations.