DSME
The author is an analyst for NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
DSME’s 1Q23 results fell below consensus due to both lower-than-expected sales and offshore plant costs. Short-term momentum is weak, but the firm’s mid/long-term profit growth direction remains valid on rising newbuilding prices (including for LNG carriers) and changes in business structure.
Mid/long-term investment points include rising newbuilding prices and new business development
We maintain a Buy rating and TP of W31,000 on DSME. Our short-term profit estimate is lowered due to recurring offshore plant losses and sluggish sales, but our 2024 estimate is hiked amid increased shipbuilding volume and stabilizing steel prices. As a result, we maintain our TP.
Investment points include: 1) rising newbuilding prices, and 2) mid/long-term business structure changes. While it is disappointing that earnings confidence has deteriorated due to continued losses at the offshore plant business, the upward trend in vessel prices due to limited slots at shipyards continues, and the direction of mid/long-term earnings improvement is clear. The Newbuilding Price Index is up 4.3% to 168.6p since the start of the year.
After gaining approval from shareholders, the company will change its name to Hanwha Ocean and its business direction will also change. The firm is expected to strengthen its specialty ship (warship) business and develop new businesses utilizing its manufacturing capabilities in renewable energy and natural gas. The offshore plant business should stabilize.
Stabilization of offshore plant margins to determine near-term performance
DSME booked 1Q23 sales of W1.44tn (+15.9% y-y) and an operating loss of W62.8bn (RR y-y). General merchant ship sales disappointed, rising to only W1.14tn (+6.0% y-y), due to fewer working days, work stoppages following an onsite accident on Mar 23, and unprofitable shipbuilding. Offshore & specialty vessel sales grew to W326bn (+93.8% y-y). However, despite a one-time gain (W110bn), the company recorded an operating loss owing to expenses (W140bn) related to rising costs for materials and outsourcing. Sales are predicted to increase to W1.7tn in 2Q23, and a return to profit should be possible in 2H23.