According to industry sources on February 6, Daewoo Engineering & Construction incurred an estimated loss of 300 billion won (US$270 million) to 400 billion won (US$360 million) in the fourth quarter of last year in its combined cycle power plant construction site in Safi, Morocco and the loss is planned to be included in its Q4 earnings. The company’s upcoming earnings announcement is scheduled for February 7.
It is said that the loss and big bath related to the power plant construction in Morocco have already been reported to President and CEO Song Moon-seon. It seems that a huge earnings shock will be inevitable for last year.
The problem is how the shock will affect the sale of the company. Korea Development Bank is about to sign a memorandum of understanding with Hoban Construction to sell Daewoo Engineering & Construction. Hoban Construction as the selected preferred bidder was informed earlier of Daewoo Engineering & Construction’s overseas losses until the third quarter of last year. However, renegotiations seem to be inevitable due to the latest loss.
According to a previous agreement between Hoban Construction and Korea Development Bank, the former is willing to pay 1.62 trillion won (US$1.45 billion) for the latter’s 50.75% shares in Daewoo Engineering & Construction and the discount that can be provided for the former concerning the loss is limited to 48 billion won (US$43 million). Besides, the latest loss may cause loan providers to refuse to provide 600 billion won (US$540 million) for Hoban Construction. Furthermore, the loss itself may exceed 400 billion won (US$360 million) with the progress of the project. “Although the exact cause of the loss has yet to be found out, the input cost may exceed the planned cost depending on the progress of the project,” said a stock market analyst.
The project in Safi is a large-scale project with a contract amount of approximately two trillion won (US$1.8 billion). Daewoo Engineering & Construction addressed most of its overseas losses in 2016 through a big bath. However, its projects in Qatar and Morocco, won in 2014, were not included in the big bath.
In the third quarter of 2017, Daewoo Engineering & Construction reflected a loss of 145 billion won (US$130 million) regarding the project in Qatar and 23 billion won (US$20 million) regarding that in Morocco. As a result, it posted an operating profit of 113.6 billion won (US$102 million), slightly more than half of the target it set in early 2017.
Korea Development Bank, in the meantime, said that it would carry on with the M&A process in accordance with basic principles and practices as losses can be detected at least to some extent during preliminary due diligence and all information and data needed have been provided in a transparent way.