POSCO Future M
The author is an analyst for NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com -- Ed.
While we raise our TP to W560,000 on a change in valuation method, we downgrade our rating to Hold considering restricted upside potential.
Valuation method changed to reflect rise in mid/long-term contracts
While we raise our TP on POSCO Future M to W560,000 on a change in valuation method, we downgrade our rating to Hold due to limited upside potential. Recently, the number of mid/long-term supply contracts has been increasing on greater electrification competition among clients. As a result, 2030 capacity and earnings forecasts are being revised up for the firm. Rather than using EV/EBITDA, which is based on performance in a specific year, we believe that a DCF valuation method can more accurately reflect changes in the company’s business environment (ie, uptick in long-term supply contracts).
For our DCF valuation method, we assume a COE of 11.9% (risk-free rate of 3.5%, beta of 1.62, market risk premium of 5.2%), cost of debt of 3.5%, weighted average cost of capital (WACC) of 6.6%, and a perpetual growth rate of 1.0%. We arrive at a fair market cap of W44tn and TP of W560,000. This corresponds to a 2025F EV/EBITDA of 35x, which is a 52% premium to competitor Ecopro BM’s 23x and a 145% premium to the Korean secondary battery industry average of 14x.
2Q23 review: Temporarily sluggish cathode materials shipments
The firm posted 2Q23 sales of W1.19tn (+48% y-y, +5% q-q) and OP of W52.1bn (-5% y-y, OPM of 4.4%), missing consensus by 6% and 17%, respectively. The recovery of the basic materials business progressed as expected, but the growth of the energy materials business (eg, cathode and anode) was slower than predicted.
Cathode sales came to W786.3bn (+126% y-y, +10% q-q). ASP upped 17% q-q on low-base effect and product mix improvement, while shipments slid 7% q-q on sluggish European demand. Shipments should recover in 3Q23 on greater supply to Ultium. Meanwhile, anode sales reached W58.1bn (-15% y-y, +3% q-q). Shipments were disappointing due to weak European demand. The firm plans to defend its utilization rate through the signing of new long-term contracts. Basic materials OP amounted to W14.6bn (OPM of 4.2%), recovering to the level seen before the spring flood.