Construction
The author is an analyst of Shinhan Securities. She can be reached at sunmi.kim@shinhan.com -- Ed.
OP beats consensus by 30% for a second straight quarter
Samsung Engineering posted consolidated sales of KRW2.5tr (+17.1% YoY, - 13.8% QoQ) and operating profit of KRW225.4bn (+29.2% YoY, +5.1% QoQ) for 1Q23, beating consensus estimates by 2% and 30%, respectively. Despite sluggish improvement in earnings from the hydrocarbon business, the company pulled in strong results on the back of: 1) 32.8% YoY growth in sales from affiliate projects; and 2) improvement in non-hydrocarbon gross margin to 14.8% (+2.9%p YoY) from settlement gains on completed projects. Although difficult to keep margins at 1Q23 highs, the non-hydrocarbon business should continue to enjoy steep growth in earnings with new order intake of KRW2.0tr added to the KRW6.3tr secured in 2022. We thereby raise our operating profit forecast for full-year 2023 by 9%.
Large overseas order intake from 2Q23 to drive re-rating in 2024 With overall earnings continuing to top market expectations, market focus is now expected to turn to growth in overseas order intake. We believe the inflow of large-scale overseas orders will become visible from 2Q23.
Potential order wins expected this year include: front end engineering design (FEED) to engineering, procurement and construction (EPC) orders for the second Chandra Asri Petrochemical Complex in Indonesia (roughly KRW2tr) in 2Q23, the Texas LNG Project (over KRW1tr) in 3Q23, and the Trans Pacific Petrochemical Indotama Olefin Complex Project (over KRW2tr) in 4Q23; and the ADNOC Hail & Ghasha Gas Development Project in Abu Dhabi. While uncertain if and when the company will secure actual orders from these projects, growing demand for FEED-to-EPC services should help to reduce volatility in annual overseas order intake compared with the past.
Meanwhile, we believe growth in overseas order intake will start to drive a re-rating of shares in 2024. Samsung Engineering's order competitiveness is improving with its modularized solution successfully shortening the construction period of the Sarawak Methanol Project in Malaysia. The company is also expected to become one of the first EPC contractors to carry out a major hydrogen project as details on order placements for large-scale hydrogen EPC projects start to come into view. As of April, major countries in the Middle East have set aside a total of USD16.2bn for 2023 and USD70.8bn for 2024 to invest into hydrogen EPC projects.
TP raised to KRW39,000 in view of improving order competitiveness
We retain BUY on Samsung Engineering and raise our target price to KRW39,000, with the target EV-to-backlog multiple up-adjusted to reflect strengths in order intake. Instead of near-term earnings, we urge investors to focus on mid/long-term improvement in order competitiveness.