Steel/nonferrous metals
The author is an analyst for Shinhan Securities. He can be reached at krpark@shinhan.com -- Ed.
2Q23 OP meets market expectations at KRW1.33tr (+88.1% QoQ)
POSCO Holdings registered consolidated sales of KRW20.1tr (+3.8% QoQ) and operating profit of KRW1.33tr (+88.1% QoQ) in 2Q23, meeting market expectations (sales of KRW20.8tr, operating profit of KRW1.22tr). Earnings volatility of the steel business increased over the past 14 quarters, affected by various events like the COVID-19 pandemic and the flooding of POSCO’s Pohang steel mill. However, operating profit from the steel business has recovered to the KRW1tr range (KRW1.02tr, +202.1% QoQ) upon the full ramp-up of production facilities in 2Q23. Operating profit at POSCO came to KRW841.1bn (+234.7% QoQ), as improvement in price spreads from ASP hikes (carbon steel +KRW47,000/ton) and falling costs contributed KRW486bn to profit in the absence of flooding-related costs in 2Q23 (KRW63bn booked in the previous quarter).
Operating profit from green infrastructure jumped 16.5% QoQ to KRW445bn thanks to brisk earnings at POSCO International. Meanwhile, operating profit from green materials dropped 55.2% QoQ to KRW4.3bn with over a two-fold QoQ increase in POSCO Future M’s operating profit offset by initial costs incurred at new secondary battery materials businesses.
3Q23 outlook: OP from steel forecast at KRW943.9bn (-7.5% QoQ)
We project the steel business to generate operating profit of KRW943.9bn (-7.5% QoQ) in 3Q23, similar to 2Q23 levels. While POSCO is expected to see a QoQ increase in sales volume, its standalone operating profit is likely to fall by 6.1% QoQ to KRW789.7bn due to the narrowing of price spreads. Expectations still remain for China’s economic stimulus in 2H23, yet we believe the policy effect should be limited in view of the country’s growing debt issues and continued downturn in the real estate market.
Retain BUY and raise target price to KRW710,000
We raise our target price for POSCO Holdings to KRW710,000, reflecting: 1) adjustment of discount rates applied to valuations of listed subsidiaries; 2) upgrade in the value of the lithium business caused by a change in COE and upward revision of EBITDA margin forecast; and 3) the value of nickel and recycling businesses newly priced in for share valuations.
The company may see wide fluctuations in the share price, affected by near- term surges in stocks of secondary battery plays. However, we believe POSCO Holdings deserves attention as it holds a strategic advantage over peers in expanding into secondary battery-related businesses on the back of the group-wide contingency plan built on a solid financial structure. Stable EBTIDA performance of the steel business and growth potential of the green infrastructure business also add to the investment attractiveness of POSCO Holdings, in our view.