Samsung Engineering
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com -- Ed.
Samsung Engineering’s 1Q23 earnings far exceeded consensus, thanks to an improved COGS-to-sales ratio at the non-hydrocarbon division. Although the lack of new orders for overseas projects is somewhat disappointing, considering the number of contracts with affiliates, there is little need for excess concern. We maintain Samsung Engineering as our sector top pick, favorably viewing the prospects for a mid/long-term expansion of hydrogen-centered new businesses.
Clear mid/long-term direction presented: From petrochemicals to hydrogen with SEC
We maintain a Buy rating and TP of W40,000 on Samsung Engineering, favorably noting the firm’s clear mid/long-term path away from petrochemicals and towards hydrogen. Currently, two hydrogen-related projects are in progress at Samsung Engineering, one in Malaysia and one in Oman. We expect that the contracts will conclude in 2024. For reference, if Samsung Electronics (SEC) switches to hydrogen generation for all of the electricity used in its domestic factories (estimated to be over 20TWh), 1.2mn tons pa of hydrogen will be needed, which would require six projects similar in scale to the H2biscus in Malaysia. In our view, the valuation gap between Samsung Engineering and global EPC companies is attractive.
1Q23 review: Non-hydrocarbon earnings improve
On a consolidated basis, Samsung Engineering recorded 1Q23 sales of W2.5tn (+17% y-y) and OP of W225.4bn (+29% y-y), significantly exceeding our OP estimate of W175.4bn and the consensus of W174.0bn. At the hydrocarbon division, cost ratio met the expected level (approximately 90%), while at the non-hydrocarbon division, cost ratio arrived at 85.2%, showing significant improvement compared to our estimate (88.0%).
In 1Q23, new orders totaled W2.1tn, focusing mainly on the non-hydrocarbon division (W2.0tn). We expect that new orders for overseas petrochemical projects will come in 2H23 rather than 1H23. But, given that private contracts with Samsung affiliates (North American LNG projects, etc) account for more than half of this year’s projected orders, Samsung Engineering is unlikely to make significant efforts to secure additional orders. For reference, orders in progress this year total US$17bn, including US$8bn through competitive bidding and US$8bn in FEED-to-EPC, etc.