SeAH Besteel Holdings
The author is an analyst of Shinhan Securities. He can be reached at krpark@shinhan.com -- Ed.
We now expect SeAH Besteel Holdings to post sales of KRW1.1tr (+5.3% QoQ) and operating profit of KRW47.6bn (+1,342.4% QoQ) for 1Q23, meeting market expectations for sales of KRW1.09tr and operating profit of KRW44.4bn. Subsidiary SeAH Besteel’s shipments likely rose 3.7% QoQ to 447,000 tons on the recovery of client industries including auto and shipbuilding. SeAH Changwon Integrated Special Steel should report shipments of 137,000 tons for 1Q23, marking a 4.9% QoQ decline from the high base of 4Q22 created as the company’s wire rod business benefited from the flooding of POSCO's Pohang steel mill, but not necessarily negative given the estimated 2.2% increase on a YoY basis. ASP levels likely improved by 1.0% QoQ at SeAH Besteel and 12.6% QoQ at SeAH Changwon Integrated Special Steel, with raw materials and energy price hikes successfully passed onto clients. 2023 OP to jump 65% YoY on accelerating recovery of domestic market The domestic market for special steel is recovering at a faster pace than initially expected. We believe domestic sales volume expanded more than 10% YoY in 1Q23, and expect growth to accelerate in 2H23 thanks to the low YoY base created by weak market conditions in 2H22. Inventory levels are now down to a monthly average of 200,000-300,000 tons vs. 400,000- ton levels last year. Improving supply-demand conditions in the domestic market should help to strengthen the company’s earnings fundamentals, driving up quarterly operating profit to KRW50bn levels on average. For full- year 2023, sales are forecast at KRW4.5tr (+2.9% YoY) and operating profit at KRW211.1bn (+65.0% YoY).
Retain BUY and raise target price to KRW30,000
We maintain BUY on SeAH Besteel Holdings and raise our target price from KRW22,000 to KRW30,000, reflecting upward-revised earnings forecasts. Recent share price gains have been triggered by: 1) company efforts to improve shareholder value through higher dividend payments to ordinary shareholders (KRW1,200 per share for 2022 vs. KRW1,000 per share to the largest shareholder and affiliated persons); and 2) rising expectations for new businesses related to the supply of special metal materials for nuclear power/defense/hydrogen applications. Although new businesses will take time to contribute meaningfully to earnings, SeAH Besteel Holdings is still seen highly attractive given its solid mainstay earnings and cheap share valuations. Shares are now trading at visibly higher levels but dividend yield is expected to reach up to 4.7%. All in all, we believe SeAH Besteel Holdings is gearing up to reclaim KRW1tr in market cap in the near term.