The author is an analyst for NH Investment & Securities. She can be reached at eunsang.lee@nhqv.com -- Ed.
We expect LX Hausys’s 3Q23 results to come in sound, matching the figures posted in 2Q23. Meanwhile, the valuation gap with Hanssem has widened. The slowdown in construction starts from 2022 is likely to weigh on sales from 2024.
Profitability remains unchanged, but valuation gap with Hanssem widens
We maintain a Buy rating on LX Hausys, but lower our TP by 13% from W71,000 to W62,000. We maintain a Buy rating as profitability remains intact thanks to stable PVC prices, strong PF insulation materials sales, and solid automobile sales at clients. However, we lower our TP as we increase the discount rate applied to our multiple (45% → 50%) in light of the widening valuation gap with peer Hanssem. In August, Hanssem announced a surprise dividend for 2Q23, raising expectations for shareholder return policy. LX Hausys is trading at a 2024F EV/EBITDA (excluding treasury stock) of 3.4x, a 60% discount to Hanssem's EV/EBITDA of 8.5x.
3Q23 preview: Earnings to come in sound, similar to 2Q23
We forecast consensus-meeting 3Q23 sales of W904.7bn (-1% y-y) and OP of W38.4bn (+150% y-y). The construction materials division should post OP of W27bn (+148% y-y; OPM of 4%) thanks to robust sales of high-margin PF insulation boards, amid stable PVC price trends. PVC prices are predicted to average US$820/ton (-23% y-y) in 2023, and remain at a similar level next year. At the materials & parts division, sales of home appliance films to LG Electronics likely stayed steady q-q, while OP is estimated at W12.9bn (+158% y-y; OPM of 5%) thanks to higher automobile sales at clients.
The decline in construction starts that began in 2022 represents a risk factor. Considering that sales occur with a lag of about two years from the start of construction, a drop in sales from 2024 seems inevitable. Sales are predicted to reach W3.4tn (-6% y-y) in 2024, with OP of W130.8bn (-4% y-y).