IT services
The author is an analyst for Shinhan Securities. He can be reached at snowKH@shinhan.com -- Ed.
2Q23 earnings surprise with OP of KRW52.7bn (+83% YoY)
Hyundai Autoever registered operating profit of KRW52.7bn (+83% YoY) on sales of KRW753.9bn (+20% YoY) in 2Q23, an earnings surprise that beats our estimate of KRW36.7bn. Mainstay businesses delivered top-line growth. SG&A expenses dropped 8.7% YoY to KRW34.6bn owing to declines in R&D and overhead costs. Operating margin improved 2.4%p YoY to 7%.
1) System integration & IT outsourcing: Sales from SI and ITO businesses reached KRW240.9bn (+11% YoY) and KRW347.6bn (+20% YoY), respectively. SI achieved growth on the set-up of enterprise resource planning (ERP) systems for Hyundai Motor and group affiliates. ITO earnings growth was driven by infrastructure projects and the shift towards digital transformation.
2) Automotive software: Sales from automotive software jumped 34% YoY to KRW165.4bn due to rising demand for in-car navigation systems and wider adoption of the Mobilgene platform on vehicles. The QoQ sales growth is also positive.
Upward revision of earnings forecasts for 2023
We have revised up our earnings forecasts for 2023 continuously since the beginning of the year due to the uptrend in sales of SI, ITO, and high-margin automotive software businesses. Full-year operating profit of KRW151.9bn was initially forecast in our January 3 report and KRW164.5bn in our most recent July 18 report. We once again upgrade our forecast to KRW195.6bn.
Our earnings forecast revision is based on: 1) mid/long-term growth engines secured for SI and ITO businesses with group affiliates seeking digital transformation; and 2) demand for automotive software rising with the rollout of high-performance vehicles. Automotive software sales are projected to reach KRW672bn (+34% YoY) in 2023 and KRW860.1bn (+28% YoY) in 2024, making up a sales share of 21.4% (+3.2%p) and 24.5% (+3.1%p), respectively.
Retain BUY and raise target price to KRW220,000
We retain BUY on Hyundai Autoever and raise our target price to KRW220,000, based on 2023F EPS and a target PER of 37.4x (15% discount to domestic/ overseas peer average). As the domestic market leader in advanced software for self-driving and automotive electronics, Hyundai Autoever is expected to lead the paradigm shift towards automotive electronics and enjoy an uptrend in sales of automotive software, as well as SI and ITO businesses. Growth of automotive software sales will likely trigger a re-rating of shares.